What financing methods have you been using to grow your business and keep cash flowing during the recession? As the economy improves again, credit card issuers are hoping more small business owners will turn to credit cards as a cash management tool.
The Los Angeles Times recently reported that entrepreneurs can expect to see more credit card offers in their mailboxes in the coming months. Why? Because the 2009 legislation that reformed credit card policies put a lot of restrictions on the kinds of rates and penalties card issuers can charge consumers. Business credit cards, however, were excluded from many of these protections. That means card issuers can charge us higher interest rates and make a bigger profit.
But while card issuers are hoping to attract more small business owners, entrepreneurs are a bit gun-shy about taking on new credit cards. There are several reasons for this. First, business credit card rates rose faster than rates for other types of cards in 2010, according to data from IndexCreditCards.com. Second, the rates can increase drastically if a business owner makes a late payment. And unlike consumers, business cardholders aren’t eligible for relief from penalty rates if they make future payments on time. That means one late payment can lead to a permanent increase.
Adding to the problem, card issuers, on their end, have been burned by small businesses that failed or couldn’t pay their balances, and now have tighter qualifications for issuing credit cards in the first place. This means even some business owners who want new business credit cards can’t get them.
These factors have made it harder for small business owners to use credit cards as they traditionally have: as a startup financing or expansion tool. Charging a sizable amount, then paying it off slowly, is too risky now. Instead, business owners the Times spoke to generally pay off their cards in full each month. While this offers convenience (credit cards are still a great cash management tool), it limits your ability to use the card for financing substantial investments in the business.
As a result, while credit card companies may be wooing small businesses, the use of credit cards by small business owners is declining. According to the National Small Business Association, nearly half of all small businesses used to rely on credit cards for financing, but in the past year, that percentage has declined to just over one-third. In the same time period, credit cards have dropped from first to third place on the list of most commonly used sources of small business financing.
Does that sound right to you? Are you using cards more or less in your business? If you get an offer for a new card, are you likely to jump at it…or toss it in the circular file?