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Back in the Nineteen Seventies, consumer use of bank cards was an emerging phenomenon that ultimately led to growth of the U.S. economy on an unprecedented scale.
However, the use of bank cards by entrepreneurs was non-existent.
Except my world.
I used to be a teenager on Nantucket when I opened my first moped rental business. It began with my customers paying all money, but eventually I used to be able to arrange a merchant account because bank cards had just come into vogue. This was great for my business because it made it more convenient for my customers.
This would also grow to be an effective way to finance the purchase of additional supplies. When my clients began using bank cards, I personally received many offers from bank card corporations. Then they’d mail them to you and you’d just use them or select not to. I remember one of the Visa cards had a $25,000 limit. I soon realized that I could process my very own bank card through my merchant account. If I timed it right, it gave me 55 days of interest-free money. I did this for months before it got here to the attention of the FBI, who called. It was a rude awakening and a preview of what would one day be banned by some bank card corporations – that is, processing personal bank cards through a merchant account to raise capital for your small business.
While bank cards may be a worthwhile business development tool, it is also vital for entrepreneurs to understand the risks and costs, in addition to the best practices associated with them.
So let’s analyze:
Risks and challenges related to the use of bank cards
High rates of interest:
Credit cards typically come with higher rates of interest compared to other varieties of financing, comparable to term loans or lines of credit. Businesses that record balances from month to month can incur significant interest charges, which, if not managed effectively, can lead to long-term debt accumulation and financial stress.
Debt accumulation:
Over-reliance on bank cards for business expenses can lead to debt accumulation, money flow problems, and financial instability. This is very true when businesses exceed their credit limits or fail to make payments on time. High levels of bank card debt can negatively impact your credit rating, make it harder to access future financing, and make borrowing costs prohibitive.
Fees and commissions:
As all of us know, using bank cards can expose a business owner to a number of fees and charges, including annual fees, late payment fees, foreign transaction fees, and money advance fees, to name a few. These additional costs can reduce profitability, reduce the value of rewards earned, and strain money flow if not factored into a business owner’s budget and expense management.
Best practices for using bank cards – the fun part
Strategic expenses:
Businesses should take a strategic approach to bank card use, focusing on core business expenses, recurring bills, and high-impact purchases that contribute to revenue generation or savings. By prioritizing strategic spending and avoiding unnecessary expenses that drain money flow, businesses can higher maximize the value of bank card rewards and minimize debt accumulation.
Payment discipline:
Maintaining payment discipline is extremely vital for entrepreneurs. This will show you how to avoid late fees, penalties and negative credit consequences associated with missed or overdue payments. Of course, entrepreneurs should strive to repay bank card balances in full and on time each month to avoid interest fees and preserve money flow for growth initiatives.
Monitor your credit utilization:
Businesses should monitor their bank card utilization rate—the percentage of accessible credit used—to ensure they are not overdrawing their credit rating or negatively impacting their creditworthiness. Keeping credit utilization below 30% of accessible credit limits will help businesses maintain healthy credit profiles and also improve access to future financing.
Please read the terms and conditions:
Before applying for or using a bank card for business purposes, entrepreneurs should fastidiously read the wonderful print or terms and conditions. This may include rates of interest, fees, rewards programs and liability provisions. Understanding the terms will help entrepreneurs make informed decisions and reduce financial risk.
Note on the diversification of financing sources
Explore alternative options:
While bank cards may be a worthwhile tool for short-term financing and working capital needs, entrepreneurs should explore alternative financing options comparable to business loans, lines of credit or merchant money advances that may optimize their financial strategy. Each financing option has its benefits, limitations, and suitability based on your small business needs and goals.
Build business credit:
Establishing and building a strong business credit profile is essential for entrepreneurs to access favorable financing terms, secure higher credit limits, and expand lending options beyond bank cards. By responsibly managing bank card accounts, making on-time payments, and keeping credit utilization low, entrepreneurs can improve their credit rating and regularly increase their access to financing.
Over the last fifty years, I’ve learned that bank cards can play a significant role in helping small businesses grow by providing access to capital, convenience and rewards. However, entrepreneurs must balance the advantages of using a bank card with the risks of high rates of interest, debt accumulation and fees. By adopting best practices comparable to strategic spending, payment discipline, and monitoring credit utilization, entrepreneurs can effectively use bank cards to drive growth and reduce financial risk.
Additionally, exploring alternative financing options and building a strong business credit profile can increase financial flexibility and resilience, enabling entrepreneurs to achieve their long-term goals and aspirations.