Business Credit Cards – The Way To Go?

The Nilson Report, in an August 2009 release, stated that there were over 539 million credit cards currently in circulation in the United States, generating in excess of 26.5 billion transactions annually, which adds up to a whopping $2.1 trillion. This works out to 3.4 credit cards for each of the 161 million working Americans, affirming our status as the most saturated credit card market in the world.

Aggressive sales and marketing techniques by banks, financial institutions and private card lending firms, coupled with an industry-wide relaxed approval process, which in some cases means automated approval, contributes to the ‘plasticizing’ of 14% of the national economy. These same techniques, which have worked so successfully with the consumer market, now appear to yield an equally successful result among businesses and corporations in the country.

Leveraging Your Cards

As reported in a 2009 Small Business Credit Card survey conducted by the National Small Business Association, over 60% of small business owners use their credit cards as a business capital source. Business credit cards have evolved into a powerful financial tool for entrepreneurs, small businesses and even corporations.

It has proven to be an unorthodox, yet efficient, revolving credit facility with immediate withdrawal and variable repayment options, allowing businesses the opportunity of easing sudden cash flow crunches. The interest rates offered for many of the business credit cards are as competitive, if not more, than conventional borrowing instruments like term and factoring loans. Introductory 0% APR (Annual Percentage Rate) and instantaneous approval offered by credit card providers presents a unique and swift capital injection solutions.

In addition, business credit cards create several other advantages. The most useful one is in the way businesses manage their external financial expenditures, reimbursements and periodic scrutiny. Rather than being forced to provide either a continuously revolving petty cash facility or quick internal turnaround to reimburse their employees, a business credit card allows the flexibility to reimburse and monitor these expenses based on their credit card statements on a monthly basis.

Citibank has taken this concept a step further. In a groundbreaking move, Citibank offers the integration of their statements with popular accounting software programs, such as Quicken, QuickBooks and Microsoft Money. Subscriber of the service has an option to directly integrated employees monthly credit card statements into the software. This eliminates the time and labor required to manually key in the expense data into the system. Moreover, these software programs provide employers powerful analytical tools to track, assess and capture any part of their company’s expenditure data.

Business credit cards generally provide insurance coverage on most purchases and services we charged the card to, such as traveling and theft insurance. While often taken for granted, the coverage is an extremely handy option to have in those unexpected rainy days.

Of course, one should not forget about the rewards scheme offered as an inducement to sign up of specific business credit cards. Gift points, which are redeemable on reaching a specific threshold, and Cashbacks, a form of back end discounts based on a customer purchasing volume, are two of the most prevalent and well-accepted schemes.

Business credit cards also offer an easy opportunity to establish a sound credit history for a firm, especially for start-ups and small businesses. This credit history could prove to be a useful tool for future financing needs with banks or investors. Conversely, a bad paymaster can have an opposite effect on their credit history.

The Pitfalls

However, beneath the glitter and prestige of owning your own business credit cards, there are several underlying issues that a business owner needs to appreciate and be aware of to ensure they avoid the common pitfalls of credit card usage.

The most important of these issues are the debt servicing. Delays or failures in repayments allows and empowers the card providers to change the term of their service by simply notifying you of their intentions by writing 15 days in advance. These changes could come in the form of increased interest rates, reduced credit limits or conversion from fixed to variable interest rate structure. The interest free facility that you signed up for could very well be converted into a fixed amount installment scheme with a 30% annual interest. A lowering down of your FICO score through new unrelated credit facilities, like buying a new warehouse, could also trigger this.

The aforementioned Small Business Credit Card Survey discovered that 63% of credit card providers had increased their interest rates while another 41% reduced a client’s credit limit over a one-year period. Apart from that, a further 23% switched their rates from fixed to variable.

Another hazardous area is cash advances. Card issuers typically charge a onetime 3-5% withdrawal charge. However, interest are charged immediately after the withdrawals are made, unlike regular purchases where you get a period of interest free days, ranging from 22 to even 90 days.

Nevertheless, despite the scenarios outlined above, an astute application of your business credit cards could prove to be a noteworthy boon, aiding you in maximizing the potential of your firm.