The Balance Small Business found that, in 2009, at the height of the Great Recession, 59 percent of small business owners had no choice but to use credit cards as a means of financing their companies. The reason for the use of credit cards by small business owners was that banks had locked most small businesses out of loans at that point.
Many business owners have questions and wonder if the practice of using credit cards to finance their enterprise is a good idea. Tuck Associates, a firm that provides solutions to businesses and consumers struggling under heavy debt, has some suggestions for business owners about the use of credit cards to fund their startup.
Credit Cards Carry High-Interest Rates
Entrepreneur Magazine reminds business owners that credit cards tend to carry very high-interest rates. Thus, they are an expensive means of financing your business. At an average of 14 percent as an interest rate, it gets very hard to pay off the balance over time. What if your startup fails, and you are saddled with heavy debt at a high-interest rate?
Entrepreneur cited a study from the Ewing Marion Kauffman Foundation that found small businesses who take on credit card debt reduce their chances of survival by 2 percent for every $1,000 they have in debt.
Realize Business Credit Cards Usually Hold You Personally Liable
Nerdwallet explains that one of the biggest issues regarding using business credit cards to finance your business is that most issuers require the owner to sign a personal liability clause. The clause basically holds you personally liable for any defaulted business credit card debt. This clause is irrespective of the fact that you, in most cases, are shielded from personal liability in your business dealings if you are a corporation or LLC. Signing the clause in order to obtain the card waives your rights to shield your personal finances.
Defaulting Can Harm Your Personal Credit and Lead to Wage Garnishment
Since you are likely personally liable for any of your business credit card debt, your personal credit can be damaged if you fail to make payments on time. Some business credit card issuers report to consumer credit bureaus missed payments, others do not. Here is a list from U.S. News and World Report of which issuers will post damaging information on your personal credit report if you miss payments for your business credit card.
Also, if you default on the business credit card, your business earnings or other wages can be garnished if you lose in a lawsuit to a creditor.
Having a Credit Card Can Help Your Business Through Recessions
If used wisely, having a credit card to help finance your business during a recession can mean the difference between weathering the bad times or having to close shop. During recessions, banks can tighten their lending requirements and cut off other financing sources for small business owners. Good use of business credit cards is in bridging the gap until a customer has paid for your services. Credit cards can be a great tool if you don’t carry a balance.
Business Credit Cards Don’t Carry Consumer Protections
Consumer credit cards have a lot of protections assigned to them by law. The same is not true for business credit cards. The issuer has the right to arbitrarily increase your interest rate without prior notice.
Tuck Associates encourages small business owners to use business credit cards with great caution. If you end up incurring heavy credit card debt in your startup phase, servicing the interest can cause cash flow problems. Call us about lower-interest business financing solutions