Credit Card Financing

Increasing numbers of entrepreneurs have turned to credit cards to finance their business ventures in recent years. Often, these credit cards were originally secured for personal use, but credit card issuers are targeting business owners for corporate cards as well. Credit cards are one resource available to small businesses with few other options to obtain start-up capital. It is by no means a desirable means of financing a start-up. Most credit cards charge extremely high interest rates making this form of financing very expensive. In terms of using a credit card as a primary means of paying bills monthly, a credit card offers small businesses the administrative benefit of providing detailed records of all charges that may be easily transferred to an accounting process.

Studies indicate that use of credit cards for small business purposes has surged dramatically in recent years. An online article published by About, Inc., part of The New York Times Company, states that two-thirds of small businesses use a credit card for expenses. Of these, 40 percent use business credit cards exclusively and the remaining 60 percent use a personal card for at least part of their credit card purchasing transactions. This represents a growing trend and one that has not been overlooked by credit card issuing companies.

Credit-card issuers are beginning to aggressively pursue small business owners in the hopes of selling them on corporate credit cards. According to Visa USA in a brief article in Cardline, commercial payment volume on Visa cards grew 20.4 percent in the year ending in the middle of 2004. Visa USA expects that these rates of growth are likely to continue through 2010 and they are launching a variety of marketing efforts to try and capture more of this growing commercial business. From the credit card companies' perspective, commercial accounts have several advantages over personal accounts. They include the standard use of annual fees with commercial credit card accounts, the opportunity to establish long-term relationships with commercial customers, and the proceeds they are able to make from extra fees for multiple cards on a single commercial account.

The reasons for the increase in credit card financing vary. Surely the single biggest factor is the explosion in overall credit card use throughout the United States during the 1990s, when overall economic expansion surged. But there are other reasons for the growing use of plastic by entrepreneurs. For one thing, many entrepreneurs contend that large banks habitually steer businesses that are looking for less than $10,000 to consumer loan departments. In addition, entrepreneurs commonly blame their use of credit cards on the reluctance of banks to provide loans. Moreover, using personal or corporate credit cards allows small business owners to skirt the bureaucratic paperwork associated with obtaining loans from banks or the Small Business Administration (SBA). Also, stories of entrepreneurial success that started with the use of credit card financing were common in the late 1990s, providing further encouragement to business owners weighing whether or not to take the plunge. Finally, small business owners who use credit cards to pay off business expenses can also use them to stretch their payment periods or earn significant points in frequent-flyer programs.

Nonetheless, using credit cards is a riskier-than-usual way to finance a company. Every month there is a huge bill instead of several smaller ones that can be juggled. Once a credit line is spent, one can not pay bills and it is a very short trip from cash flow trouble to general weakness to bankruptcy. Entrepreneurs who have parlayed their credit cards into business success caution fellow business owners to pursue other financing options before turning to credit card financing. If credit card financing is the only or best alternative for getting the necessary money to start a business, there are ways in which to minimize the potential downside of this sort of expensive financing. The following six credit card management techniques were presented in the About, Inc. article.

1. Apply with Those You Know: Always consider applying for a small business credit card at the financial institution you already use. Your banking relationship may aid with the approval process. When you need an extension of credit you will have a relationship established with your lender helping with credit applications over $100,000 not using automated scoring systems.
2. Limit Card Hopping: Signing up for multiple cards in an attempt to take advantage of deals can have a negative impact on your credit rating. It is also more difficult to manage many cards well.
3. Use Grace Periods: The majority of small business credit cards offers a 21-day grace period before you have to make payment on your purchases. Improve your cash flow using a credit card instead of checks.
4. Pay Online: When possible save time and extra costs by paying your small business credit card online versus paying by teller at a branch or mailing in your payment.
5. No Cash Advance: Reduce credit card fees and interest costs by not using the cash advance feature on your card. Cash advances incur more fees and costs. Use your business account debit when you need immediate funds.
6. Avoid Late Payments: Late fees and high interest rates quickly erode the merits of using your small business credit card. Be responsible by paying off as much of your balance as possible each month.

see also Banks and Banking; Capital Structure; Cash Flow Management

BIBLIOGRAPHY

"6 Steps to Effective Small Business Credit Card Management." About, Inc. Available from http://sbinformation.about.com/od/creditloans/a/creditcard_p.htm. Retrieved on 6 February 2006.

Green, Charles H. SBA Loan Book. Adams Media, 2005.

Hise, Phaedra. "Don't Start a Business Without One." Inc. February 1998.

Pinson, Linda, and Jerry Jinnett. Steps to Small Business Start-Up. Dearborn Trade Publishing, 2003.

Snavely, Brent. "Credit Card Financing: Tempting but Risky for Small Businesses." Crain's Detroit Business. 14 August 2000.

Walter, Robert. Financing Your Small Business. Barron's Educational Series, 2004.

                                    Hillstrom, Northern Lights

                                     updated by Magee, ECDI