Using credit cards to improve cashflow and/or finance their small business is a time-honored tradition amongst managers and owners.
Stories abound of successful entrepreneurs maxing out their cards to reach a profitable plateau.
Keep in mind, however, that for every success story, there are also many not-so-successful tales.
In the past, these less than successful ventures left many individuals with credit card balances locked into 24% rates and credit ratings in tatters.
Happily, for entrepreneurs today, credit card rates have come down significantly for those who have managed to clean up their credit ratings.
In fact, some industry experts believe today's current low interest rates are enabling new entrepreneurs and small business managers to tap the credit card market to finance growth.
Credit Card Deals Abound
At the same time, the appetite by credit companies' appetite for added volume has not diminished. Banks also have another incentive to grow their balances. As banks merge, having larger credit balances adds to the value of the acquisition.
Just recently, Bank One purchased the credit card balances of Circuit City retail stores, while in the process of merging with Morgan Stanley. Besides added volume, the purchase increases the total "footings" and thereby the purchase price, according to industry efforts. The ailing retail firm sold off its lucrative credit card operations to focus on shoring up its outlet efforts.
Happily for small business managers and would-be entrepreneurs, deals are still out there for individuals trying to start or expand their businesses. Another advantage to credit cards. They are quicker to obtain and use than loans or credit lines from banks.
However, there is a significant catch.
With the advent of credit rating services and "scoring" of personal credit worthiness, mixing business and personal has new meaning. Tying the company's success to personal credit ratings is fraught with danger that can extend for as long as seven years. This is the length of time generally used by rating analysts in reviewing individual creditworthiness, according to industry observers.
So if the business fails or credit card bills are not paid on time, the consequences are both personal and professional. These payment habits get reported to the credit bureaus.
Equally as important, each individual has a personal credit limit. Every time an individual adds a credit line, either on a card or through the bank, he or she is drawing down on that total borrowing capacity. Keeping borrowing flexibility is critical to an individual running a business.
Managing his or hers personal total borrowing capacity should be an everyday concern of every small business owner.
Nonetheless, the temptation to add and use credit cards is greater now than at any time in recent years.
Rates Are Low
Credit rates are still relatively low compared to the 24% interest rates of prior years.
Smart entrepreneurs have been taking advantage of this situation to obtain "cheap" money. With rates as low as 2.4%, credit card balances are a good way of financing seasonal slumps. Since most of these lower rates are offered for a limited time, it is important that they be redeemed when the promotional period ends.
Credit card companies are betting that individuals will not payoff the balances and higher rates kick in. Given the past history of American consumers, they are probably right.
However, there are ways for the individual to beat the system.
For Robert Ruggiero, a Belleville, NJ caterer, cheap credit card rates enabled him to finance the first year of his new delivery car without paying a single dollar in interest.
Ruggiero did this by borrowing the entire cost of his PT Cruiser, about $17,000 on a new Visa credit line. The card had no interest for the first six months. Paying just minimum amounts until the first six months were passed, Ruggiero then switch the balance of this advance to a MasterCard account. When the interest free grace period for this line expired, Ruggiero hopped to another new interest card for five months.
At the end of this free interest offer, he financed the car with his home equity line of credit at just 4.3%, again a special offer from his bank.
The only thing he could have done better was getting travel or hotel points for the balances.
Unlike a lot of small business owners, Ruggiero was in the happy position of not previously drawing down on his credit lines. Anxious to get him to activate and use these lines, his credit card companies peppered him with offers.
Industry experts expect that these special offers are probably a thing of the past. However, new offers are coming across the desks of small business owners every day.
Often, they are being combined with point programs from companies such as American Airlines, Marriott, and Continental airways.
Most are designed to tap into the personal credit lines of the individuals.
Offers Vary, Abound
At the end of 2003, American Express and other card providers are also increasingly looking at the small business sector.
Capitol One and American Express are offering special cards for small businesses. Just recently, Bank One teamed up with Marriott to offer a card that was aimed at small businesses but offered Marriott rewards.
Besides the Marriott points, the solicitation had a seductive appeal. The letter offered "to free you (the recipient's) personal credit lines for (the recipient's) individual needs while providing greater control and financial flexibility."
Combined with the Marriott bonus points proffered for joining, the offer was almost too good to be true.
Alas, it was.
Besides requiring the company's financial information, more detailed than D&B's usual requests, the operator sought the owner's financial data to be accessed via his or her social security number.
In addition, when the information taking was completed, the respondent learned that he or she would be responsible for the card.
In short, the card was a personal card with the company's name on it. The company and the individual were jointly responsible for payment.
Bank One's Position
To be fair, Bank One has another take on this approach.
Michael Noles, Senior Vice President for Bank One laid out the bank's position.
"The card and its credit limit are based on the information provided by the company along with the owner's or authorizing officer's credit ability," He said. "Whatever credit is extended to the cardholder does not appear in any consumer reporting survey except in the case of default at some level."
Nonetheless, small business owners rushing to take advantage of this offer need to know they are still on the hook for the charges incurred on all the cards issued.
As most business owners know, default of a small company's charges is also a personal as well as professional black eye.
With the advent of credit rating services and "scoring" of personal credit worthiness, mixing business and personal has new meaning.
Tying the company's success to personal credit ratings is fraught with danger that can extend for as long as seven years. This is the length of time generally used by rating analysts in reviewing individual creditworthiness, according to industry observers.
Small business managers trade-off time and effort for money. Looking for the best credit card deal can deliver significant dollar savings. Managing these accounts require time, dexterity and a little bit of luck.