(This column originally appeared in The Inquirer)
For most business owners, getting a credit card is easier than getting a bank loan. Why? Because a bank reviews financial information, contracts, performs other due diligence, and requires collateral before issuing a loan. With less risk, it can then charge less interest. Credit card issuers don’t require this kind of due diligence and therefore must charge a higher rate of interest to make up for the added risk they’re assuming.
Approximately 79% of small employers use credit cards for business purposes, according to a study from JPMorgan Chase & Co. This kind of financing can be very expensive. But if handled the right way, a credit card can be a significant tool to help business owners manage their cash flow and even finance growth.
Just because interest rates — which can range from 18 to 30% — are so much higher than a bank loan doesn’t meant that using a credit card for your business is a bad idea. For some, especially start-ups and early stage companies, it may be the only choice in this current economic environment. According to a recently published survey of more than 1,200 small business owners by Goldman Sachs, 78% say they “are concerned” about their ability to access capital, and 29% say they can’t afford to take out a loan given current interest rates.
“Despite what some may say, having a credit card is great way to help a business owner pay for very short-term purchases, get discounts, and even help to better manage cash,” said Adam Spooner, owner of Pareto Impact Consulting, a business advisory firm based in Bethlehem. “However, it’s important that if you get a card, you get it for a reason, and have a plan for using it.”
Evaluating the costs and benefits of different cards
Spooner points out that credit cards are expensive only for those business owners who carry over a balance for a long period of time. Even though the interest is tax deductible, he recommends using a credit card as a way to finance very short-term expenditures and then taking advantage of the “float” period where you don’t get charged interest until the due date of your statement.
Davita Pray, a certified public accountant based in West Chester, tells her clients who are considering a credit card to evaluate sites like NerdWallet and Bankrate, which regularly compares cards that are specifically targeted at small businesses.
“Choosing the right card can be tricky,” she said. “But there are plenty of good resources available to help find one that fits your needs, as long as you closely evaluate both the costs and benefits.”
Like me, Pray enjoys traveling and personally leans toward cards that offer points or miles. Some credit cards come with special perks for their customers, such as access to concert tickets or airline lounges. Perks and awards for purchases can usually be shared with employees.
“For example, if your business uses Amazon, Prime Members are able to get a credit card that offers a 5% rebate on all purchases made from the site, which, over time, can really add up,” Spooner said. “It’s a mathematical exercise. You should estimate your annual purchases, calculate the cash back offered, and then make sure you take into consideration any annual fee that may be charged.”
Make sure your company credit cards have a purpose
Both Spooner and Pray said that credit cards are best when there are specific objectives for their use.
Spooner said some of his clients who make international purchases rely heavily on their credit cards because they find it much easier to pay for materials or supplies rather than deal with wire transfers or ACH payments, which take longer and can be more expensive. Credit card purchases can be disputed before any cash is disbursed by your company, which provides an extra level of protection against fraud.
“Most credit card issuers work seamlessly for overseas purchases and as long as you’re paying off the balance that month, you can save on fees,” he said. “Just make sure the exchange rate is reasonable.”
Credit card transactions are also faster and can be used in a pinch when a supplier or vendor needs money right away. A credit card can also serve as a form of bridge financing — like making a deposit to secure a lease or property — before converting the debt it into a more traditional loan. And if money is needed in an emergency, a credit card can be useful.
Yes, interest rates and fees can be high but only if you let the debt accumulate. And, particularly for smaller businesses that plan on growing, managing your credit card balances prudently and displaying a good payment history will not only help improve your ratings with credit bureaus but also make you a more attractive candidate for traditional bank loans in the future.
Credit cards may also help with bookkeeping. Pray has clients that rely on the card issuer’s regular statements, which categorize expenses, specifically if multiple credit cards are made available to employees for business purchases. Credit card transactions can be set up to be imported into popular accounting software, like QuickBooks and FreshBooks, which saves times on data entry and improves accuracy. Expense management platforms like Expensify, Concur, and Ramp can automatically bring in credit card transactions and make payments with little human involvement.
“Some business owners think that credit cards are a bad thing,” Pray said. “But if used the right way, a business credit card can be a significant resource to help manage cash flow and build a good credit track record.”
