Using Credit Cards the Right Way

April 2011

If you operate a business, there are a million different things you need to manage and take care of on a daily basis. Unfortunately for many, managing your business credit rating, and in turn, your business credit cards, often gets pushed to the back of that list. But to succeed as a company, it is imperative to make sure your business is as reputable to creditors as it is to customers and vendors.

Too many small businesses fall into debt due to poor credit management strategies. According to a recent Tower Group report, more than two thirds of small businesses use a credit card for expenses, but only 40 percent of companies use a business card exclusively. While there are different theories on whether you need to completely separate business and personal expenses, in most cases you will need to use your personal credit history to initially obtain the business financing.

Once you've obtained a business line of credit, or small business credit cards, it's important to manage them just as carefully as you do your personal credit (by paying bills on time, not using it for cash advances unless necessary, and limiting card hopping).

The biggest things that you need to be aware of as a business are to: avoid co-mingling, keep good records and file monthly reports, effectively manage your cash flow, and take on debt only if it will help to drive incremental revenue.

  • Avoid co-mingling—Mixing personal and business expenses, particularly for a start-up, can be the toughest things to manage. But you need to use common sense, even if you've received your business line of credit via your personal credit history. Any mistakes, missed payments, purchases exceeding your credit limit, or simple mismanagement can be damning to not only your business rating but your personal credit score. In other words, don't charge your plumbing repairs to your small business card. By using your small business card for only pure business expenses, you are showing the IRS and creditors that you are serious about your business, which will help you to obtain more credit and improve your rating.
  • Check your mail—While it may seem petty, it is as important as ever for businesses to keep tabs on what their credit cards are doing. And that means checking the mail. While the passing of the CARD Act in 2009 was aimed mainly at consumers and has little impact on business lines of credit, creditors are changing policies, fees, and more than in years past. By monitoring what your credit cards are sending you, you can realize if there are fees you don't want to pay, if you need to switch cards, or if your business will be affected by new reform.

    "There are many nuances to small business credit cards," says Molly Brogan, a spokeswoman for the National Small Business Association, the oldest and largest non-partisan citizen advocacy group in the U.S., representing more than 150,000 small businesses. "You need to first understand what protections your card does offer as a small business, and then you'll understand more clearly what it doesn't."
  • Generate and monitor regular monthly reports—"So many companies completely forego monthly financial statements," says Jeff Van Winkle, a board member for the National Small Business Association who works with Clark Hill, a law firm that provides legal services to many small to mid-sized businesses. "You need to establish where your company is at financially each month so you know whether or not you have enough capital to pay all of your debts, including your credit."
  • Manage your cash flow—One of the major differences between business owners who continually stay in the black and those who don't is their focus on cash-flow management. Ask any successful business owner, and they will often confirm that the easiest way to maximize profit is to manage your cash flow. 
    "First, look at your business plan and your monthly budget," says Beverly Harzog, a financial journalist and spokeswoman for "When you know what your cash flow is going to be from the beginning to the end of the month—specifically, which days might be higher than others—that can be a huge benefit to you. You can then negotiate with your creditor your balance due date so it coincides with the flow projection."

    Better cash-flow management will assist you in meeting payroll demands, reducing your dependence on quick collections and taking advantage of opportunities to increase funds, such as offering discounts to vendors or clients for faster payment.
  • Get rewards that matter to you—One of the best benefits for small businesses is that small business credit cards often offer great rewards, which can be very specific to your industry and interests. "If you spend a lot of time in the car driving with your company, you might want a card that includes gas rewards," Van Winkle says. "Really, there are so many options out there that you can't afford not to do your research."
  • Take on debt only if it increases revenue—Hiring new staff, moving to a new and more profitable location, or buying equipment upgrades are good reasons to take on considerable debt. But if your business is set up solidly, and you begin making purchases solely because you "think" it's a good idea, you are bound to make it more difficult for the revenue to grow.

Source: "Responsible Credit Card Use for Your Business," Inc.