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When (and When Not) to Use Credit Cards for Your Business

Many business owners view credit card financing as a tool that can be handled under the right circumstances. About 33 percent of small businesses used credit card financing in the past year to meet their capital needs, according to the National Small Business Association’s 2011 Year-End Economic Report. Credit cards ranked the third most commonly used source of capital financing, behind only bank loans and the earnings of the business.

Credit cards can be a useful tool for your business, as long as they’re used appropriately. Business cards often will offer better rates than personal cards, but interest charges for unpaid balances can still be high. Make sure you know your card's interest rate and annual fee (if any).

Here are some guidelines for when—and when not—to pull out the plastic for your business.

When using credit cards makes sense

  • Making recurring payments. If you use your business credit cards for recurring expenses, it can help you improve your business’s credit score and help you keep more cash on hand.
  • Tracking expenses. Using credit cards can help you easily keep track of your business expenses. Both you and the Internal Revenue Service will appreciate that at tax time. Don’t forget to deduct the credit card interest that applies to business-related expenses. (But also remember you can't deduct personal expenditures as business expenses.)
  • Building a track record. Showing that you have used your business card wisely on a regular basis can be a good way to build up your business’s credit rating with Dun & Bradstreet. It also helps you make a good case for yourself when you apply for a small business loan.
  • Covering short-term expenses. Credit cards can come in handy when you need to make a short-term financial outlay and expect it to be recovered quickly. For example, a consultant may use a credit card to cover travel expenses knowing he’ll be reimbursed in 30 days.
  • Staying current. Credit cards also may help you stay current with your vendors if you need to hire a subcontractor before you get paid. They can help you take advantage of opportunities that might be hard to pursue without additional capital.
  • Taking advantage of rewards. Many cards will reward purchases for office supplies or hotel stays.

When using credit cards doesn’t make sense

  • Starting up. Loading up on debt when a business is young can choke cash flow later.
  • Losing money. Borrowing to pay the bills at a money-losing business is not the best idea. The owner may need to look at the overall business operations and consider restructuring to get the business to break-even.
  • Purchasing large items. It isn’t a good idea to use credit cards to finance large equipment, because that often will devour a lot of the available credit. For big-ticket items, low-cost financing or leasing is a better option.

Lee Fulcher can be reached at (865) 766-3077 or lee.fulcher@pnfp.com.

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