Strategize Wise Spending with Your Small Business Credit Card
Small Business Credit Cards: Seven Tips for Smart Management
Navigating the world of small business credit cards can be tricky, especially for start-ups or businesses looking for a more accessible funding option. Since the 2008 recession, traditional lenders have become more selective about doling out loans to small businesses. That's where business credit cards come in, offering various lucrative perks that could propel your business to new heights – if managed wisely.
But beware! Misuse your business credit card, and it could quickly become a burden, leaving you drowning in debt. Here are seven strategies to help you maximize your card's benefits and maintain efficient debt management.
1. Understand the Perks and Pitfalls
Before jumping into the world of credit cards, familiarize yourself with their primary advantages and potential drawbacks:
- Quick Access to Cash: With a readily available credit line, you can make purchases on the go, even in times of cash flow gaps.
- Credit History Building: Regular and timely repayments can strengthen your business credit history. Conversely, missed or late payments can negatively impact your credit score and hinder future loan opportunities.
- Personal Guarantees: Banks may require personal guarantees to secure a business credit card, putting your personal assets at risk in case of financial hardship for your business.
2. Keep a Closer Eye on Your Expenditures
If multiple employees in your company use business credit cards, it's vital to monitor all purchases. Credit card companies provide monthly statements outlining every transaction made. These statements also categorize spending by employee usage, allowing you to identify unnecessary spending and address any employee misuse of business credit cards. Compare these statements with your company's books to spot any discrepancies or signs of potential fraud.
3. Pay Your Bills on Time (and in Full)
Late payments accumulate interest and can harm your credit score, reducing future loan prospects. Set up an automated payment system to ensure recurring payments to suppliers and lenders are made on time. If possible, aim to pay your balance in full at the end of each month to save on interest charges.
4. Separate Personal and Business Transactions
Resist the temptation to use your business credit card for personal expenses, as this makes expense tracking more challenging and could lead to maxing out your credit limit. Keeping your personal and business transactions separate shows lenders and the IRS that you are financially responsible, potentially boosting your credit standing and loan prospects.
5. Choose the Best Card for Your Business
Selecting the right credit card can be a daunting task, considering the abundance of options available. Key factors to consider:
- Annual Fees: Some cards come with annual fees, ranging from $0 to hundreds of dollars. premium cards often offer additional benefits like point-reward systems, travel miles, or seat upgrades.
- Charge Cards or Standard Credit Cards: Charge cards require you to settle your balances at the end of each billing period, while standard credit cards offer month-to-month balances.
- Customized Rewards Programs: Choose a card that offers rewards programs, including insurance, tailored to your business's lifestyle. For example, if your business involves frequent travel, a card that rewards airline ticket purchases may be suitable.
6. Maintain a Low Credit Utilization Ratio
Your credit utilization ratio (CUR) plays a crucial role in maintaining your business credit score. A high CUR generally corresponds to a lower credit score. Aim to keep your CUR below 30% to ensure reasonable credit usage and ease debt management.
7. Act Promptly in the Face of Fraud
Credit card fraud is a prevalent concern among cardholders, and small businesses are no exception. In the event of fraud, report the incident promptly to minimize potential losses. Depending on your issuer's security measures, they may offer options to replace your stolen card or allow you to lock the card through a mobile app.
In Conclusion
Small business credit cards can be an invaluable tool for SMBs when used responsibly. By following these seven tips, you can successfully manage your debt while reaping the rewards of a strong business credit card. Consistent adherence to good credit card habits will help you build your business credit history, increase your chances of qualifying for better financing options, and open up new opportunities for your enterprise.
Small business credit card article and permission to publish here provided by Roel Mahalin. Originally written for our platform and published on March 12, 2021.
Sources:
- Gueits, M. (2020, September 3). Mirroring personal credit: Why SMEs often struggle with access to finance. Investment Monitor. https://investmentmonitor.ai/mirroring-personal-credit-why-smes-often-struggle-with-access-to-finance/
- Haldeman, C. (n.d.). Small Business Credit Cards: How to Maximize the Benefits and Minimize the Drawbacks. SmallBizGenius. https://smallbizgenius.net/small-business-credit-cards-how-to-maximize-the-benefits-and-minimize-the-drawbacks/
- Jordan, T. (n.d.). How to Build Business Credit: A Step-by-Step Guide. Nav. https://www.nav.com/articles/how-to-build-business-credit/
- Nakazawa, J. (2021, March 12). Finding the Perfect Small Business Credit Card. Money Crashers. https://www.moneycrashers.com/small-business-credit-card/
- Stein, M. (2021, March 9). 12 Expert Tips for Responsible Credit Card Use. LendingTree. https://www.lendingtree.com/credit-cards/articles/12-expert-tips-for-responsible-credit-card-use/
- To ensure efficient personal-finance management, small business owners should maintain a low credit utilization ratio (CUR), as a high CUR can negatively impact their credit score and limit future funding opportunities in the world of business finance.
- Prudently managing small business transportation expenses through savvy credit card use can contribute to boosting the business's financial growth and personal-finance security by building a strong business credit history.
