So you have this brilliant new business or entrepreneurial venture. You created a solid business plan, did your research, and are on your way to becoming profitable.
Naturally the next step is to apply for a business credit card, right? Well, maybe not. Business credit cards are not the only option.
According to data from the National Small Business Association, about 42% of small-business owners carry a credit-card balance. Before you jump on the small business credit card wagon, consider the risks listed below.
The CARD Act doesn’t apply to business cards
Per the 2009 CARD Act, creditors have to disclose their fees and interest hikes. However, they found a (sneaky) loophole around this law.
They discovered they could add “business” to their card’s title, giving them free reign to exploit and penalize cardholders, just like they did before such practices were considered illegal.
Unlike personal credit cards…
- Issuers can change account terms at any time
- Penalties and fees are basically unrestricted
- They have higher annual fees
Most cards that are targeted for business or commercial use, often result in hundreds or thousands of dollars in unexpected fees and higher interest rates.
The line of credit can be dangerously high
If you’re new to the business start-up scene, having a high credit limit is very tempting. It can be dangerous to buy the best office equipment and use credit to get your business off the ground.
Taking on too much debt without the necessary resources to back it up, is a formula for failure. Instead, choose to grow with your business and avoid the high credit card limits.
You’re personally liable for the business debt
Almost all business credit cards include a personal liability waiver. Which means, once you open the account and start using the card, the issuer can come after your personal assets for the balance, if the account becomes past due.
This can include charges made by the owner, business employees and any authorized users of the card.
It could hurt your personal credit history
Since you’re personally liable for business debt, if the account becomes delinquent many lenders will inform the credit bureaus.
If your company can’t keep up with the card payments, you might have to dig into your personal savings and assets to keep the account current. Otherwise you risk hurting your personal credit history.
You’re at the mercy of the card issuer
Why do so many companies use small business cards if they’re so risky? Well, sometimes it’s the only option available.
Sadly, it’s much easier to get approved for a small business credit card, than get a loan or find a venture capitalist to invest in your idea. This leaves your business at the mercy of credit card issuers, and that’s never a good idea.
Are small business credit cards a good idea?
Having access to high credit limits, being at the mercy of the creditors and having no other options is a recipe for disaster. Before applying for a small business card, consider cheaper alternatives and resources for funding your business.
Using a credit card can be unwise because you’re promising future income to pay current expenses. Enter into this decision with caution, the risks may out weigh the rewards.