Potential Pitfalls of a Business Credit Card

Potential Pitfalls of a Business Credit Card

When you are starting a new business, it makes sense to get a business credit card, right? For many entrepreneurs, some debt is required to keep the company growing. Credit card debt is most tempting for seasonal entities or new ventures trying to succeed.

However, a business credit card is different from other kinds of business debt, like lines of credit, factoring or loans. Surprisingly, it’s also distinct from a personal credit card. For smart debt management, carefully weigh the many pitfalls of regularly using a business credit card. Is it a tool that will help your business or a potential hazard to your credit rating?

No Purchase Protection

Many business people take for granted that items bought with a credit card are somewhat insured. Most personal credit card companies will help you correct billing errors or return items; however business cards do not have this protection. If protection is an important feature to you, ask the issuer if they can add a form of insurance to your card and what the fee will be.

Employee Misuse

Typically entrepreneurs have a small business credit card and will be the only individuals with access. Larger organizations may have corporate credit cards, which employees use for business expenses. In the case of the corporate card, there is a potential for employees to use it inappropriately. Frequently monitor all charges and set guidelines for approved card use if you choose to give employees access.

High Fees and Variable Interest Rates

Credit cards usually have higher interest rates than lines of credit. Your credit card interest rate may increase based on usage, while a bank interest rate is usually locked in for the loan term. Your credit card company may apply fees such as late charges to an unpaid balance. In short, a credit card is an expensive form of debt; something to keep in mind if you will carry a balance.

Personal Credit Liability

As the cardholder, you are personally liable for all charges. The card company will review your credit history during the application process. Before you decide to apply for the card, understand that a bank would also check your credit for a less risky loan. Decide which product is worth the hit to your credit.

Reliance on Credit

A business credit card comes with potential risks. Credit charges should be a short-term solution to a business cash flow issue. Some entrepreneurs think of a credit card as similar to a loan or line of credit. In reality, carrying a balance on a business credit card can be a sign of weak cash flow.

By remaining aware of what you owe, you can change your business plan to get on a solid financial footing. You can avoid business debt by factoring with a reputable service. The factor will purchase your outstanding accounts receivable invoices at a percentage of what is owed to you. You receive funds and can keep your cash flow healthy without going into debt.

As a small business owner, you should make the choices that are right for you and your enterprise.

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