The Wall Street Journal has a piece on how credit card companies are targeting small businesses.
Credit-card use is soaring among small businesses. Many entrepreneurs find it’s faster and simpler to sign up for a card than to apply for a bank loan. Others are turning to plastic because they don’t qualify for bank loans. And they’re using the cards, ones geared toward small business as well as consumer cards, to pay for just about everything — including health insurance, energy bills, taxes and photographers.
Card spending by small businesses on tax payments and preparation alone jumped by 80% in the 12 months ended February 2007, according to a report by Visa USA, based on data about spending on Visa cards by 600 small businesses during that period.
To say that I am not a big fan of using plastic to fund small businesses is an understatement. I have seen too many small businesses forge ahead prematurely with a business idea using what seems to be easy credit to secure. It is expensive debt that is almost always personally guaranteed. So even if the business fails, the credit card debt remains for the entrepreneur. They also make spending just too easy. Most of us have experienced this at one time or other in our personal finances.
Again from the WSJ:
Experts say business owners need to remember that there is good debt and bad debt — and to respect the difference. Good debt generates revenue; bad debt consumes it.
Furthermore, credit cards don’t provide an impartial adviser on sound borrowing practices, so it’s critical to build a relationship with a banker or other knowledgeable adviser outside a credit-card company.
Amen!! This is critical advice for any small business owner. If you can’t get other credit for your business there is probably a good reason. Make sure you understand why they have concerns about your business.
The real story about credit cards in my opinion is how credit card companies are going crazy offering more and more and more “rewards” to consumers, and then forcing business owners to pay a higher card fee whenever the consumer uses that card.
So *I* am paying for all of these people’s airline miles and cashback programs. It costs an extra percent to 2 percent whenever someone uses one of those cards.
Credit cards are great and all, and I couldn’t have an Internet business without them.
But it is frustrating how the credit card companies just pass on all of their costs to businesses, and it just keeps going up and up.
Ironically, I use a company rewards card with many of my suppliers who take credit cards. So I complain, but I am also part of the problem. I pay off my cards each month, so why not get a reward for using it? It adds up really fast with big company purchases.
I’d be curious the credit card balance on the business card usage. I agree that credit card debt is a poor way to finance a business but there are many positives when used wisely. I’ve found use of credit cards for business purposes to be very positive for the following reasons:
– Ease of use since most everyone takes cards for pmts
– Simplified payments via ACH payments directly from business checking account without the need for paper checks.
– Eliminate or minimize late payment fees since payments don’t have to wait for the mail to be received.
– Many cards offer “Reward rebates” which can help reduce business expenses
Of course proper accounting and tracking applies as in any business purchase.
I agree that credit cards can be good to use for transactions/payments. My concern is when people use them as a source of funding for a small business.
I agree with Jeff – I’ve witnessed the effects first hand. My parents opened a business with another couple (probably also a bad idea) and used credit cards to “fund” operations while they were attempting to get things up and running. Ultimately the cash flow just wasn’t enough to fund operations and pay off the credit cards. They were a partnership so they were liable for the debt and ended up having to declare bankruptcy. It was and remains a huge mess for everyone involved, several years later.
I think it’s just good sense that if you can’t pay for it today, or at least have a really good idea of how you’re going to pay for it tomorrow, you shouldn’t buy it. Business or personally.
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using your credit card at a pay phone can be risky business. Save yourself a fortune
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