All Posts Tagged: business expenses
Is plastic the best way to finance your business?
Using a credit card may be one of the easiest ways to cover business expenses, but many owners who go this route may be setting themselves up for hurdles in the future. Let me tell you why.
First, the facts: Credit cards are one of the most common financing tools for small businesses: 36% of small businesses say they used credit cards to meet their capital needs, according to the National Small Business Association’s 2014 Year-End Economic Report.
In some circumstances a credit card can work fine for a small business with limited expenses, when that business won’t be looking for bank financing in the foreseeable future. But if your business is growing, here are two big reasons to think twice about using a credit card to fund your small business:
1) “Separation of church and state.” Many small business owners co-mingle business and personal expenses on one card. This can make it difficult to monitor expenses and have a clear picture of a business’s financials.
This can become a real headache if the business eventually seeks a line of credit or an SBA (U.S. Small Business Administration) loan from a bank. Banks and the government need a clear picture of a business’s performance when determining financing options. Credit card statements that mingle personal and business expenses are difficult, if not impossible, to use when seeking a conventional or SBA loan.
2) Mismatched financing. A great rule of thumb to follow is to match long-term credit with long-term assets. A credit card is a form of short-term borrowing. If the user plays his or her cards right, they can pay off the balance each month and avoid the relatively high interest rates that come with an unsecured line of credit. Rarely would you buy a car with a credit card, if you can get an auto loan with a much lower interest rate that uses the new car as collateral.
Likewise in business, it is usually more cost-effective to lease long-term assets, such as computers and machinery, or acquire them with a term loan, than purchasing them on a credit card. By using a lease or a term loan, a business may be better prepared to replace equipment since the term of the financing coincides with the life of the asset. But, if the asset is financed at a credit card’s typical double-digit rate, the owner may not have paid off the balance and may not be in a position to purchase a replacement when the equipment has fully depreciated or come to the end of its useful life.
Every business has a unique financial picture and growth prospects. There are situations when a credit card can do the job when used prudently, and there are times when a business may be better off talking through financial options with a banker. That time is usually before a business runs up a heavy credit card debt. I’ll end with this sobering point from a 2012 small business finance report from the National Federation of Independent Business (NFIB): “Credit card holders maintaining balances of more than $10,000 after monthly payments are virtually never able to obtain additional credit.”
Thus it’s best to carefully evaluate all of the financing options available to a business before simply pulling out the plastic.Read More ›