The following is a guest post by Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card offers and gift card exchange.
Small business success has always been a risky proposition. This fact is ever more glaring in difficult economic times such as those we are currently experiencing. Thus, small business owners often search for the best money-saving deals possible and look to minimize cash flow uncertainty. Interestingly, one way in which they can accomplish both of these goals is to avoid funding certain purchases with business credit cards.
The new credit card law (CARD Act) has safeguarded consumers from predatory issuer practices by instituting numerous protections for personal credit card use. Credit card companies now can’t do things like change a customer’s interest rates during the first year his or her account is open. Similarly, issuers cannot increase the APR of an existing balance unless the account holder is at least 60 days delinquent. Such measures have increased the predictability and usefulness of personal credit cards, but, business credit cards, unfortunately, did not receive the same protections. Thus, holding a balance on one is risky because credit card companies can raise interest rates at any time and for whatever reason, making debt more costly and extremely hard to manage.
Small business owners need not be resigned to using business credit cards simply because they sound like the logical choice. In fact, either a loan or a personal credit card would be a very good replacement to fund purchases that would lead to an owner carrying a balance at the end of the month.
Many owners might be reluctant to eschew their business credit cards for these options for fear that doing so will make them more vulnerable to liability. People often assume that because a business credit card is geared toward businesses, it naturally shields them as individuals from any financial troubles like delinquency and default by conferring liability on the business itself. However, there are no liability differences between small business credit cards, personal credit cards and personal loans. The individual owner is solely liable for each because, in the minds of lenders, a small business owner is essentially his or her business. There is, therefore, no reason to risk using a business credit card for purchases that will not be paid in full at the end of the month.
A personal loan from a company like Lending Club would actually be a good option for funding this type of spending because such organizations often offer loans with fixed interest rates and lower net costs than those provided by traditional banks. This type of loan would provide the debt stability that a business credit card cannot. You can use a Lending Club personal loan to boost an existing business or as a complement to your start up funds. However, taking out a loan to pay for future purchases requires foresight and discipline. An owner employing this method would have to be able to accurately determine future spending and would need to allocate his or her funds intelligently once a loan is garnered.
Small business owners can also use personal credit cards for those purchases that will lead to them carrying balances. As mentioned, personal credit cards are covered by a variety of CARD Act protections that, among many other things, make their future debt payments predictable. Therefore, with the use of such credit cards, owners are afforded a clear sense of their company’s overall finances without having to worry about or account for a potential increase in the cost of their debt.
Still, business credit cards are valuable to small business owners. Such cards make it easy to track business spending and allow business owners to dole out cards with personalized limits to employees, while earning rewards on employee spending. Thus, because of their operational utility, business credit cards should be used only for those purchases that will be paid for in full at the end of the month.
Therefore, in practice, a small business owner should use either a personal credit card or a personal loan in combination with a business credit card. Doing so will ultimately confer upon this individual the benefits of each payment type, allowing for full debt control, certain business utility and organizational stability. Long-term business success centers on the ability to adapt, so adjust to the changing credit card landscape, evaluate your business and select the combination of funding options that will best suit your needs.
As 2011 gets underway, many people have sworn to get their finances in order in the new year. Come on, admit it! You probably made a money-related new year's resolution. The problem is most people go back to their normal routines and those financial resolutions get forgotten pretty quickly.
If you don't think the first week of the year is a tough one, you must be from another planet. After all the celebrating, gifting, shopping, overindulging and family gathering, you can't but experience a rude awakening once you are back to "normal". Financial realities hit you the hardest this week, especially if you were already in debt before the holidays.
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