Sometimes when clients are slow to pay or unexpected business expenses come up before payments are scheduled to come in, small business owners use credit cards to pay their bills.
Sometimes when banks and other lenders say no, which has been happening more frequently, small businesses finance large purchases with credit cards, despite the high interest rates.
Sometimes credit cards are the only option for small business owners with cash flow problems who want to keep the doors open.
But soon those who use credit cards to finance small businesses will be protected from unexpected interest rate hikes, high fees and penalties, thanks to the credit card reform bill signed into law by President Barack Obama in May, right? These sweeping reforms, which go into effect in February 2010, will protect small businesses that use credit cards, right?
Sorry … if a card is a small business credit card rather than a consumer card, the reforms don’t apply. In fact, credit card companies might make things worse for small business card holders since they’ll be looking for someone they can still pick on. They will undoubtedly be looking for ways to make up the $15 billion in penalty fees the White House estimates the industry could lose each year as a result of the new regulations on consumer cards.
BUSINESS VS. PERSONAL
Many small business owners do use consumer credit cards to make business purchases and more will probably opt to do so because those cards fall under the new law’s protection. But this option may not always be wise. There are still advantages to small business credit cards.
Using a small business credit card helps you avoid mixing business and personal spending, which in turn helps prevent tax problems and money management headaches. Keeping business purchases separate indicates to the Internal Revenue Service that they are, indeed, business purchases.
And using a small business credit card makes bookkeeping easier because it simplifies the tracking of business expenditures for tax reporting. Many credit card companies provide a year-end statement summary with transactions itemized and categorized. This eliminates the hassle of hunting down receipts.
A small business credit card also provides the opportunity to build business credit. This is helpful as a business grows and needs capital in the form of credit lines or loans.
Small business credit cards also enable you to manage employee spending by allowing you to provide cards for individual employees with preset spending limits.
When a business owner is first issued a small business card, he or she is personally liable for the debt incurred. Personal and professional finances are combined so if the business defaults on credit-card payments, a creditor can come after the person who signed the card. Most card issuers require borrowers to agree to this provision on the application.
But after using a small business credit card for five years or more and establishing a good credit record for the business, the owner can negotiate with the credit card issuer to separate the account from his or her personal finances. The individual holder of a consumer credit card is always personally liable for all debt incurred on the card.
MORE BUSINESSES USE CARDS
If you find yourself using a small business credit card more but are, at the same time, less satisfied with the terms, you are not alone. Access to capital is a challenge for new businesses as well as those that have a long and strong history. All face the credit crunch, bank consolidations and changes in the lending market, and many entrepreneurs have been forced to finance their startup or growing firms with credit cards.
The U.S. Small Business Administration Office of Advocacy conducts an annual study on small business lending. In 2008, American Express Bank and Capital One Financial Corp. were among the top five small business lenders, indicating the growing role small business credit cards have come to play in the financing of small businesses.
In addition, the National Small Business Association conducted a Small Business Credit Card survey in the second quarter of 2009, which showed that 59 percent of respondents had used credit cards in the past year to finance their business, up from 49 percent in December 2008. Contrast that with the 16 percent of small-business owners who identified credit cards as a source of funding in 1993.
The recent increase in credit card use occurred despite a rise in the number of small businesses reporting worsening credit-card terms. Asked to evaluate their credit-card terms over the last five years, 79 percent reported worsening terms — up from 69 percent in December 2008.
NSBA data also shows that 71 percent of the small-business owners who use credit cards as a source of funding are carrying a balance month-to-month. This is up from 64 percent in 2000. Twelve percent of small business owners are carrying a balance of more than $25,000, and 38 percent are carrying a balance of more than $10,000.
WHAT CAN YOU DO?
Several lawmakers attempted to get the credit card reforms extended to small business cards, but they were voted down. The best they could do was get a provision included that requires the Federal Reserve to conduct a review of credit card use by small-business owners with fewer than 50 employees. The report, which is supposed to include recommendations for initiatives covering small business cardholders, is due to Congress within 12 months of the reform bill’s signing.
Until protections are extended to small business credit cards, users of such cards must be vigilant and take the fight against interest rate hikes and excessive fees into their own hands. Watch your statements closely and question any unfair charges. Read the fine print. Open and read all correspondence from your credit card company, reduce your balance as much as you can and, if possible, pay it off each month. You might also want to get involved on a national level by contacting members of Congress and urging them to take up the issue again; this time extending protection to small business credit cards.
