Tips for small-business owners seeking credit cards

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For fledgling small-business owners, credit cards are invaluable. Having a business credit card can help you cover office supplies, networking lunches and other expenses, such as renting a workspace or paying for Internet and phone lines.

“The majority of business owners use credit as a way of injecting some liquidity into their business, especially in the beginning,” says Richard Moxley, author of The Nine Rules of Credit and spokesman for eCredit Fix, which helps consumers learn about improving their credit score. Moxley has been an entrepreneur since 2005.

You might not qualify for a card specifically aimed at businesses, so many people who are just forming their businesses apply for a regular credit card, then use it for business expenses.

Moxley and Daniel Kelly, president and chief executive officer of the Canadian Federation of Independent Businesses, have a few tips for small-business owners to keep in mind when they’re credit card shopping:

1. Pick your priorities wisely.
Credit card perks might include opportunities to earn free airplane tickets or hotel rooms, cashback and low interest rates. So what do you choose?

If you’re relying heavily on the card to afford all your purchases, a card that gives you cashback could help you recoup some of those costs.

“On the consumer side, there’s an obsession with reward points, but the cost of the reward points could be 20 times their value,” Kelly says. With cashback, you can actually earn back some of what you spend, then use that money to pay your bill or buy future necessities.

Moxley opts for reward points, though. He takes advantage of writing off business expenses.

If your business leads to a lot of travel, travel-specific rewards might be the best way to go.

So consider your business, what you’ll need now and in the future, before you apply for a credit card.

2. Look for perks that can save you in the long run.
Some credit cards come with benefits such as insurance, low or no foreign exchange fees, or very low interest rates.

Decide if you want those benefits, since they may come with higher fees. Consider what you’re using the card for, Kelly says.

For instance, if your major suppliers are in the U.S. or abroad, you could be spending a fortune on foreign exchange fees. It may be worth paying a higher annual fee in exchange to forgo the foreign exchange fees.

If you’re going to be travelling a lot, you may be better off finding a credit card that offers perks such as rental car insurance.

3. Know your terms.
Before you open a credit account, be aware of all the card’s terms: the interest rate for purchases and cash advances, your due date, what happens if you miss a payment. Are you going to lose out on a promotional interest rate or face penalties if you’re late?

If you’re eyeing a secured credit card, know that the card will be tied to your personal savings or other assets as insurance.

You want to be clear on all the terms and conditions of the card so you aren’t caught by surprise later, when it’s too late.

4. Get approved for a business credit card before you quit your day job.
Be sure you qualify for a business credit card before becoming self-employed, Moxley says. Your chances of qualifying for a higher credit limit are better if you have some income to show the bank.

“My clients always say they don’t want to have high limits,” Moxley says. “I tell them that when you need money from the bank, they’ll never give it to you, and when you don’t need it, they’ll give it to you.”

Once you quit your job, your income will take a hit, meaning you’ll garner a lower limit and a higher interest rate on your new credit card because you’re viewed as a riskier borrower.

Take the credit now, while you can still get it, Moxley says.

5. Don’t mix business and personal.
“As long as the account is solely being used for business, it doesn’t matter if it has a personal name or business name,” Moxley says. “The separation is really for bookkeeping.”

However, if you got the card for business purposes, use it solely for business expenses. And be sure to make your payments on all your credit cards, personal or business, because they’re more intertwined than you think, he says.

“Your personal credit is what allows you to get approved, even if you’re a corporation,” Moxley says. “If you wanted to start a business next week, they’re going to rely 100 per cent on your personal credit.”

If you miss a payment and your creditor does a random spot check, you could have your credit card limits lowered or your interest rates hiked. That could hurt your business’ bottom line and wiggle room for available funds.

6. Always keep a paper trail (physical or virtual).
Your credit card statement isn’t enough when you’re making business claims. Hang onto receipts, invoices and bills and attach these records to your statements to keep everything organized.

You can keep everything paperless by using online or mobile organization programs and apps, as long as your records are organized and thorough

7. Stay lean.
Both Kelly and Moxley advise small-business owners to use credit as a tool and not as a means to keep your business running.

“Your credit card is great for short-term expenses and shouldn’t take more than 30 days to pay off,” Kelly says. “It’s not good if your income stream to cover credit card costs is coming months away.”

Start with low overhead costs and don’t expand into office space or hire staff unless you realize it’s necessary.

“A credit card offers a delay in payment, which is an attractive feature if you don’t have revenue yet to pay the bill,” says Kelly. “But it really needs to be used with caution – as many have learned the hard way.”

See related: Choosing a mobile card processor for small business, How to get a U.S. dollar credit card

Published January 31, 2017

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