November 1, 2014

The Upside of Business Credit Cards

A recent credit card article focused, in my view, disproportionately on the negative aspects of using a business credit card to help fund your small business. As its centerpiece, the article featured an entrepreneur who had over $10,000 on a business credit card, only to have the business venture go south, leading to missed payments and a jacked-up interest rate. 

As anyone who’s ever tried to start a business knows, a failed venture can lead to debt that haunts you long after the business is an unfortunate memory, regardless of where the financing came from. 

That said, many small businesses can and do benefit from business credit cards, especially businesses with a track record. Those who get into trouble are more likely to be startups who use credit cards to finance a dream. While this approach has led to some of the more celebrated and inspirational entrepreneurial triumphs, it also leads to many poor outcomes that don’t make the headlines. 

A Cash Flow Tool 

In my view, the most proper and best use of business credit cards is as a tool to manage cash flow. If there is one universal problem that frustrates small business owners, it is the tendency to have enough work to do but not enough cash on hand to finance the work until payment arrives. A business credit card can (at least partially) solve this problem, letting you buy goods today that you don’t pay for until next month. This “float” can significantly improve cash flow, making it more likely that you’ll receive payment from customers before the card’s bill comes due. 

Whether you’re a contractor floating building supplies or a service provider charging office equipment while making payroll, an extra month can be the difference between success and biting your fingernails to the bone. 

There are many other benefits a business credit card can provide, including rewards, documentation of business expenses, separation of personal and business spending, and more. I’ll tackle those more in depth in the future. For my money, though, using credit to smooth out cash flow is the strongest argument for having a card (or two) on hand.

Be Honest With Yourself 

Before you go out and sign up, though, be honest with yourself: will you use the card only to finance the most necessary parts of your business, paying it off each month with your business’ receipts? Or will you succumb to the urge for an office foosball table, like some lame remnant from the dot-com era? If it’s the former, go for it. If it’s the latter, you should not only avoid business credit cards, but maybe avoid running a business altogether. 

* * * * *

Justin McHenryAbout the Author:  Justin McHenry is president of credit card comparison site Index Credit Cards, and has been widely quoted on the subject of credit card issues by publications including the Wall Street Journal, USA Today, BusinessWeek, Money Magazine, Newsweek, U.S. News & World Report, the Chicago Tribune, and more. Of particular interest to Small Business Trends readers would be the section on Index Credit Cards devoted to business credit cards.

23 Comments ▼
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Justin McHenry




23 Reactions

  1. Welcome Justin! I’m sure you’ll add some great advice about the use of credit cards for business. They definitely can be a good cash flow “gap” closer as long as they are used judiciously.

  2. You hit the nail on the head! I use my business credit cards just as you said – with virtually no problem at all. It is actually a blessing and frees me up to get the job done. I see my credit card as cash, where the cash is just applied 20-40 days later. I just do EVERYTHING in my power to make sure I pay off the entire balance each month. Since I think frugally and have self control, I avoid buying at all unless it is critical for making the business when business funds are tight. I’m glad that someone else sees the positive!

  3. Justin, couldn’t agree more. The risk comes for folks who get the offers “you are approved up to $100,000″. That makes for some temptation…

    Seriously though, I think most business owners have to be doing this, particularly today. One does need to be careful, but it just makes sense.

    I’d be curious to know what other methods fellow biz owners are using, if not credit cards. And i’ll have to go check out your site to see how the Amex Plum card stacks up against other ones. I use the Costco one for my business.

  4. Oops, Justin. I also meant to mention that Anita did a great post about this article as well.

    http://www.smallbiztrends.com/2008/10/credit-cards-on-the-rise-with-small-businesses.html/

    There are a bunch of good comments in there and ideas for biz owners similar to yours that may be worth a read. Anita commented about the quick math to figure out if you’re in dangerous territory with your balance doubling due to high interest rates.

  5. TJ,

    You mention the Plum Card and it is an interesting one when thinking in terms of cash flow in that you can delay payments for 2 months as long as you pay 10% of the balance. Advanta recently came out with a card that gives you 90 days interest-free on all purchases. It’s not a one-time thing; it’s on every purchase you make. I don’t know anyone who has one — it sounds like a logistical nightmare for Advanta in tracking 90 days from each individual purchase. It will be interesting to see how long it stays on the market.

    Thanks all for the welcome.

  6. Some business owners I work with use different credit cards for different purposes; one card for all business office and computer supplies; one card for all business entertainment, gas, travel expenses; etc. Not only do the cards help with cash flow (important for an industry where customers pay on average in 55 days); but they can track their expense categories fairly easily with a couple of cards. You do need to consider the card as a short term debt and pay it out in full each month. Use cards that provide either rebates at the end of the year or some loyalty-type programs (e.g. air miles rewards, etc. and use those to reduce travel expenses or for gifts for employees, customers, etc.)

  7. Wow… Welcome Justin and I am glad the Small Business Trends community of business experts are growing. Looking forward for more posts from you. ;)

  8. There is a problem with credit cards that I don’t think we have fully discussed. A small business owner who is headed for failure is frequently in denial about the future of their business. In a cash world the lack of capital forces that owner to face reality sooner.

    In many cases the failing business looks to credit card companies for that last ditch effort to save the business. That strategy RARELY works. Most of the time it, this is the debt that follows the owner long after the business has closed. The business was dead when they filled out the credit application, the owner just wasn’t ready to admit it yet.

    If you have customers that pay in 55 days why not build up some real capital to cover it? If you use a credit card to do that and your 55 day customer becomes a 75 day customer, what is your strategy, surf balances?

    Real world example – client’s biggest customer (60% of revenue) went from paying in 3 days to paying in 60 in a service based company. This client had working capital to cover payroll in that transition period. They were given 60 days notice of the change in policy. Had this company been using credit cards to manage cash flow instead of having real working capital t would have been a scramble to find a line of credit to cover the shortfall.

    Unless you are in line for a bailout from the government, a small business has to have real working capital. Too many owners use credit cards to supply that capital and rarely does that strategy work.

  9. Jan,

    I agree with you, but sometimes working capital is a luxury that a small business doesn’t have, especially if the business is growing. For example: a small business gets a bigger order than the business is currently equipped to handle. The business owner wants to grow and sees this as a huge opportunity. However, the predicament is that the business owner is going to have a lot of expenses upfront to complete the job, in both human resources and hard goods, before getting paid. Unless a business has a really healthy balance sheet with plenty of reserves, the money is going to have to come from somewhere to pay the upfront costs until the client’s payment comes in.

    The danger of course is that you float some of this payment on a credit card or a credit line and then the client stiffs you. One remedy is to try to get partial payment up front, but sometimes a small business owner is going to take whatever terms they can get in order to get their foot in the door with a big client that could mean big growth in the future. These are the wonderful perils of being a small business owner!

  10. This is a great discussion. I like hearing everyones experiences and tips on this hot topic. I think, if used responsibly, credit cards can be a life saver. As long as you can resist the urge to use them for non-essentials and pay them off every billing period, then they pose little threat.

  11. Justin,

    The “danger” is the REALITY more often than not, especially in this current economic climate. The business owner who sticks his neck out to grow with leverage often gets his head chopped off. Owning and building a small business takes great sacrifice and planning. Most of our small business owners need to step back and build on a good foundation before they go rushing forward. Credit cards encourage imprudent spending. There is a reason why McDonalds will let you use plastic to pay for a Happy Meal – you spend more freely!

    When you use a credit card you agree that you borrow money today and that the credit card company can change the terms of your contract on that “purchase” on any date with a mere 15 day notice. Who in their right mind would seek a line of credit for operating capital under those terms?!? If you need working capital to grow you shouldn’t be looking a a credit card to accomplish that.

    In the situation you describe I would suggest a number of other options, one would be to ask the customer for a deposit on that order to cover upfront costs.

    There are enough perils in owning a small business even without using credit cards, why buy more risk?

  12. Jan,

    I don’t think we’re in disagreement. But the reality is that as a small business person you are always taking chances, from the moment you decide you’re done working for someone else to the moment you buy or lease an office to…etc. There are times you fly without a net.

    Obviously you are in much better shape if you have working capital to cover all costs, although this usually means you grow at a slower (but safer) pace. Beyond that, you’re better off if you have a small business loan with a lower interest rate. Beyond that you get into using credit cards, which are often the tool of choice for owners who want to grow more quickly — because the cards don’t require jumping through the hoops that a bank loan requires, often to be turned down anyway.

    Not to belabor the point, but there is a difference between a business owner using credit cards to grow a business and a consumer using a credit card to buy a flat-screen TV he/she can’t afford. The business owner has (or should have) good reason to believe that using the card is going to bring him/her more income in the long run than the interest they’ll pay today. In that case, you could look at it as an investment in the business. On the other hand, the flat-screen TV buyer is purchasing an asset that only goes down in value.

    Hopefully I’ve made clear my thoughts that using credit to finance a pipe dream is un-wise, but I also believe that using credit as a cash flow tool can make sense.

  13. Justin, I don’t wish to belabor the point either, so this is my last comment on the subject.

    The people that work in collections for AmEx, Discover, Visa and MasterCard, don’t care what you spent the money on. If your /AR collections are running slower or if you are looking at a 56″ flat screen, they simply want to get paid.

    In 18 years of experience I have seen that managing cash flow and managing growth are both critical to success. A business owner who uses credit cards because they are in a hurry to grow likely isn’t a business owner who takes the time to develop a strategic plan or a budget. Using a credit card to pay for operating expenses is not strategic. Owners do it because they are in a hurry, because they want an easy answer, because they underestimate the risk, because they won’t take the time to consider other options. I have rarely seen it work to grow a small business. I have frequently seen it result in the death of the business with the owner taking a hit on the personal credit as well.

    Most people who have accumulated wealth will tell you that the slow and steady method works best.

    The risk reward analysis on using credit cards for operating expenses is like walking into a casino and thinking you are going to make money to catch up your house payment. It might happen, but the deck is stacked against you.

  14. I don’t know what else to say. I believe there can be a place for credit cards in a small business’s toolbox. Different businesspeople have different levels of comfort with that. No doubt you can get hurt, but I believe they can help as well.

  15. As a small business owner, I could not have gotten my business off the ground without credit cards — especially in the first two years. It took 2 years for this business to grow big enough that there was enough traffic to generate ad revenues to make this a going concern. But in those first two years I had expenses. Little cash coming in, and lots going out. Credit cards helped me manage until the revenue starting flowing at a better pace.

    I use credit cards responsibly — and that’s the key. But I would not have foregone the use of credit cards just because it posed some risk. I deem using credit cards as a manageable risk. I take risks every single day in many many ways. I take risks hiring people or signing long term contracts — who knows what disaster might happen that would cut my revenue in half and make it not possible for me to meet payroll or my contractual commitments? I take risks in taking on new work, that I know will increase my near term costs, but which has long term potential. And those are just a few examples. But I still take on those risks because I feel based on what I know and how I manage my business that I can handle them. :)

    — Anita

  16. Wow.. that was it, Anita. It’s a matter of Risk Management… ;)

  17. I think it’s a matter of having a big picture idea of where the business is going and a road map to get there. Way too often, small business owners don’t do that and that’s where they can get in trouble. You had a road map Anita and you managed it well. Too many small business owners only have yesterday and tomorrow on their horizon with very little thought about the future.

  18. Yes, bank cards of different types could be a part of the toolbox. Justin McHenry: Do you have figures how common it is with credit cards in different countries? I remember how I got plenty of credit cards offers during my university studies in America. I passed on these offers until I had a job after my graduation.

    All the Best,

    Martin Lindeskog – American in Spirit.
    Gothenburg, Sweden.

  19. Justin, thanks for using our BusinessWeek story as a jumping-off point. Your point on using credit cards for cash-flow management sounds spot on.

    One point I want to clarify: the company referenced in the story didn’t go under. They did have a joint venture with another company that went sour, and they were left holding debt related to that on their business credit cards.

    Anyway, looking forward to reading more of your thoughts on small businesses using credit cards.

  20. Thanks John,

    I’ve been keeping up with your team’s blog at BusinessWeek and am happy to see this post referenced there today.

  21. Managing credit cards for me is really a bit difficult but in this case, the rise of credit cards for business is essentially dedicated to be well managed.

  22. @John Tozzi — love the stuff you guys are doing in the New Entrepreneur section. Have two startups that i recently learned about. One is an ad platform for Twitter…. It had to happen eventually. http://www.Adjix.com

    The other is a SaaS play: http://www.Shiftboard.com — online scheduling for contingent workforces (temps, contractors). I’ve been doing some research work for them and am about to post some new HR type studies in the Research section that i edit here at: http://www.SmallBizTrends/research

    @Justin — terrific work guiding and encouraging the conversation points. I’m not surprised at the activity level as people are feeling the pressure.

    On a cash-flow basis — how many of our business owners are hearing requests to push an invoice or a PO into 1Q2009? I know that on some of the sales projects i’m on; prospects are saying yes, but only if they can write the check next year. Not unusual in even a great economy, but the tone is different now.

  23. Terrific article. Credit cards should be used as a cash flow tool, an almost never to finance a dream.

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