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.
* * * * *
About 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.
More in: Credit Cards