Credit Cards – Good/Bad for SMBs?

business credit card

Your business credit card can be very useful, if used wisely.

In response to a question I received regarding whether credit card debt is good or bad:

Credit card debt is not bad or good, it just is.

  • In other words, credit cards and credit card debt can be good or bad for your business. It is not the actual cards; it is how you use the cards. The question is: Are you in control of your business’ credit card debt or do you have an increasing balance you can’t control? Business credit cards provide an excellent means of tracking smaller purchases because most providers provide summary and detailed, categorized transaction histories online. Business credit cards also provide a means of managing cash because you have 25 days from the billing cycle’s end to pay in full, giving you time to collect customer payments.

With debt, matching is important.

  • This (matching) means you use short-term debt (business credit cards) to cover short-term expenses and long-term debt to cover long-term expenses. Businesses run into trouble when they use short-term debt to cover long-term expenses. The rules around short-term debt can change and cause issues. If you max out your credit card buying office or computer equipment, and do not have a term loan, customer payment, or investor ready to pay off the balance, you have created a potentially high risk scenario. If the card’s interest rate increases or the bank reduces the credit limit, you have no cash to make the payments.

Businesses run into similar issues with other high interest debt or debt-like options.

  • Businesses run into similar issues with other high interest debt or debt-like options such as factoring or advances on credit card receivables. These all have their place, but you must practice discipline, or have a plan to graduate to lower interest options, or longer term options, such as term or equipment loans. Although debt is the cheapest source of capital, debt only works for you if your business generates the cash flow to repay the debt on a timely basis. If you don’t have the cash flow, you need to increase revenues, restructure operations to reduce costs, or inject equity yourself or through investors.

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