I don’t know if you’ve been following it, but that young lady named Susie from those Verizon commercials sure has had a meteoric rise – from the owner of a single front-yard lemonade stand to neighborhood magnate to venture capitalist darling to, eventually, the nationwide distributor of “Susie’s Lemonade.” So, how’d she do it?
Via data solutions, according to Verizon, as apparently “The Business With The Best Technology Rules.” That can’t be it though; fictional little Susie must have at some point needed a way to make company purchases, manage debt, etc. That means she, like all young entrepreneurs these days, needed to choose the right small business credit card.
Starting Your Credit Career
The biggest obstacles most young entrepreneurs face in funding their business enterprises or getting truly rewarding credit cards are their credit scores and the law. You see, the CARD Act – legislation that took effect in February 2010 – necessitates that people under the age of 21 either have a co-signer or be able to demonstrate sufficient individual income or assets to make a credit card’s minimum payments.
Most young people also have limited or no credit history, which means that the credit cards they could conceivably get – whether they be business credit cards for new businesses, credit cards for people with limited credit history, or secured credit cards – will have low credit limits.
As a result, credit building is the first order of business for most young business people. Interestingly, a credit card is the most efficient credit building vehicle given that information about card use is reported to a cardholder’s major credit reports each month. This means that finding a way to meet the CARD Act’s application criteria is imperative.
Once they do so, entrepreneurs must focus on staying well below their credit limits and paying their bills on time every single month so that the information streaming into their files at the major credit bureaus is positive and impactful.
When their credit standing improves (significant gains may be seen within a year; direct mail offers are good indicators of progress), young people can begin implementing a more lasting business payment strategy. This too is influenced by the CARD Act.
Developing a Strategic Company Credit Card Strategy
The CARD Act introduced a number of new rules and consumer protections, but they only apply to general-use (personal) credit cards. This means that when using business credit cards, entrepreneurs are not protected by laws such as that which prohibits issuers from increasing the interest rates on general-use credit cards unless the cardholder is at least 60 days delinquent on payment.
In order to garner the debt stability necessary to accurately manage a growing company’s financials, young entrepreneurs must therefore use personal credit cards for all funding (i.e. expenses that won’t be paid off before the end of the month). If they do not, they risk the cost of their debt increasing at any time, for any reason.
At this point, it is important to point out that the idea of a business credit card shielding its user from personal liability is nothing more than a common myth. All of the major credit card issuers hold business credit card account holders liable for debt. Therefore, young business people will not be sacrificing anything by using a personal credit card for business.
It’s also important to note that business credit cards do serve a distinct purpose: They allow cardholders to easily track company expenses, set individualized limits for employee spending, and earn rewards on every dollar they and their employees charge, among assorted other perks that vary by card. A two-card strategy, whereby a personal credit card is used in the aforementioned manner and a business credit card is used to make purchases that will be paid for in full by the end of the month, not only allows entrepreneurs to garner unique business benefits, but also find the best possible terms for revolving debt and earning rewards. No single card offers the longest 0% APR introductory term as well as the best rewards, after all.
Of course, having the right credit cards does not ensure business success, but armed with a solid plan for handing entrepreneurial expenses, young people who decide to go into business for themselves have a much better chance of following in Susie’s footsteps.
Lemonade Stand Photo via Shutterstock
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This is a cute article! I love how you drew “Susie” into it.
Welcome to the expert crew, Odysseas!
Using credit cards as a finance method is common, but needs to be handled with care. Interest rates on even the best credit cards can cost you a fortune if carrying balances.
The two-card strategy sounds like a great idea! I agree with Robert that business owners should be prudent in their use of business credit. In most cases it’s also a good idea for business owners to use their business credit cards strictly for business expenses, particularly if their business is a corporation/LLC.