The Uses and Abuses of Credit Cards in Your Business
by Barbara Weltman
Published July 17th, 2007
Credit cards are a small-business owner’s best friend. They’re easy to obtain and convenient to use. More than one-third of small businesses use business credit cards (also called "corporate cards" whether or not the business is organized as a corporation) and nearly one half of small-business owners use their personal credit cards for business.
The Uses
Purchasing power. Businesses that are experiencing tight cash flow can obtain the goods and services they need by charging items on a credit card. For instance, say you have outstanding receivables but need to purchase something immediately. You can charge it today with the expectation of being able to pay it off in full within a month or two at most when you collect the receivables. In this situation, since the cost of financing is modest because of the rapid pay off, the use of a credit card is wise.
Recordkeeping. Credit card companies may keep better records of the things you’ve charged than you do. Their statements are broken down into categories useful in your financial reports and tax returns (e.g., one category is travel and entertainment expenses). The statements run from January 1 through December 31, even though your billing period may be fixed at a mid-month date.
Idea: Request an annual statement if you do not receive one automatically–usually you have the option to view this online.
Managing employee plans. If you have certain employee plans, credit cards are an ideal way to track expenses. Use a company card for:
–Reimbursements from flexible spending accounts (FSAs) and health reimbursement accounts (HRAs). Issue a card to employees with instructions that it be used only to pay reimbursable expenses. The IRS has approved this reimbursement method.
–Accountable plans for travel and entertainment costs. Issue a card to employees for charging business expenses, such as meals, gasoline and hotel stays, where appropriate. The credit card statement helps employees substantiate their travel expenses to you, as required for an accountable plan.
Obtaining rewards. Certain business credit cards may generate frequent flyer miles, gasoline credits and other cash-back rewards for card usage. For example, MasterCard now offers an eBay credit card where you can earn points that can be redeemed on eBay (www.mastercard.ebay.com). As long as you use cards for convenience and not for long-term financing, these rewards are icing on the cake. However, you’re overpaying for these rewards if you receive them while incurring monthly finance charges.
The Abuses
Substituting for conventional financing. The cost of borrowing through a credit card is substantially higher than borrowing through commercial loans and lines of credit. There is no interest ceiling on credit cards, which may charge as much as 30% (on an annualized basis) or more. In comparison, small-business loans can be one-third as costly or even less.
Idea: When buying equipment or merchandise, rather than simply charging the purchase to a business credit card, ask the seller about its financing options. You may be eligible for seller-financing at interest rates substantially below those for credit card borrowing, even if you might otherwise have difficulty qualifying for a conventional bank loan or line of credit.
SIDEBAR
Find the right card for you
There are dozens of business credit cards to choose from. They differ in many ways, including annual fees, monthly interest rates and credit limits. To research offers, compare cards feature-by-feature and even apply online, go to CreditsCards.com and click on "Business Credit Cards."
Big Ideas for Small Business is a free monthly online newsletter from Barbara Weltman, author of The Complete Idiot’s Guide to Starting a Home-Based Business, Third Edition, and The Complete Idiot’s Guide to Starting an eBay Business. www.barbaraweltman.com
