How to use small business credit cards

There’s a great discussion about using credit cards in the comments on this post by Justin McHenry on Small Business Trends. He jumps off from an article we published in August about how small businesses increasingly rely on credit cards in lieu of traditional loans and bank lines of credit.

Justin makes a great point that credit cards can be invaluable to cover expenses while you wait for clients to pay:

Whether you’re a contractor floating building supplies or a service provider charging office equipment while making payroll, an extra month can be the difference between success and biting your fingernails to the bone.

One of the companies I talked to for the original piece, Zip Express Installation, used credit cards to get up and running but always paid the full balance each month. Lots of business owners use cards this way, or as a convenience to track expenses, without carrying a revolving balance that accumulates interest.

So we should distinguish between using credit cards for cash flow and using them to borrow for longer periods. One of the issues I wanted to highlight in the piece is that more traditional types of long-term debt — like bank loans, lines of credit, and SBA loans — are harder for small businesses to get. With fewer options, many turn to credit cards for longer term financing.

The trouble people run into when using cards to borrow is that the terms — that is, interest rates and credit limits — can change even if the borrower hasn’t missed payments or gone over the limit. (Anecdotally we heard some stories like that in September during Wall Street’s meltdown.) If you charge a large purchase on a credit card and count on paying it back over time at the rate offered, realize that the rate can change on your balance retroactively.

I’m glad Justin will be blogging on credit cards at Small Business Trends. It’s an important issue for small business owners, so check out the discussion there.

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