Credit cards and your business - what you need to know
The ongoing financial crisis has had a painful impact on businesses across the country.
Many previous successful firms have found it impossible to get the credit they need, and are struggling with reduced consumer spending.
One of the consequences has been a surge in the number of entrepreneurs running their business using personal debt. Many are dipping into savings or taking out loans in order to keep their firm afloat.
Worryingly, many are also using credit card debt as a way to finance their venture. This is never recommended. Credit cards are about the most expensive form of debt imaginable, and they are not a sustainable foundation on which to build your business.
Sadly, though, some businesses have been forced to rely on plastic. If you find yourself in this situation, you should consider ways that you can keep the cost down – and move towards more sustainable forms of finance.
Understand the costs…
Misunderstandings about the true cost and terms of credit card finance are worryingly common. If you are considering running your business on a credit card, it is imperative that you understand how much it will set you back.
A quick glance at some of the major credit card providers’ websites shows headline interest rates that frequently push 20 per cent. This is clearly a high enough cost in itself – but you should remember that there may be additional expenses to factor in. For example, you may incur financial penalties if you miss a payment. You should also make sure that you understand how quickly interest will arise on purchases.
…and factor them in
If you are running your business on expensive credit card finance, you should seriously consider changing your pricing in order that this is reflected. For example, if you are using your credit card to purchase stock, you may need to increase the retail price so that the added expense is accounted for.
Of course, your decision here will depend on your circumstances. Some firms may, for example, choose to absorb the increased cost in an attempt to remain competitive.
Avoid interest where possible
Whenever possible, go for a credit card that provides you with a decent interest-free period on purchases. You may be able to secure as much as 90 days’ credit before you have to pay any interest – although you should understand that deals like this are in decline, and that they tend to be available only to those with good credit histories.
At the same time, you should ensure that you pay back your debt before the end of the interest-free period whenever possible.
Consider it a short-term option
Running your business on a credit card is simply not a sustainable long-term proposition. It is risky and expensive, and should be avoided wherever possible.
If you are forced to use a credit card for these purposes (and the economic situation has meant that many businesses have been), you should make sure that you also put in place plans to move onto a more sustainable financial footing in the medium term.
Don't use cash advances
It may be tempting to use your credit card to get a cash advance when times are particularly tough or, for example, when you need to pay wages. But you should avoid this wherever possible. Cash advances generally attract a one-off fee, and interest on the advances tends to be significantly higher than the rate charged on purchases.
Remember rate rises
Finally, you should keep the spectre of interest rate rises at the forefront of your mind at all times. Although it seems clear that the base rate will not rise during 2011, the market now expects to see a hike at some point in the early part of next year. This will undoubtedly have a knock-on effect on credit card rates.
Remember that credit card debt, unlike many business loans, tends to move with base rate. When the Bank of England increases the base rate, the cost of your debt could be increased significantly. You should factor this into your projections – and, of course, try to ensure that you pay off your debt as quickly as you possibly can.