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Making it as a small-business owner is tough. The oft-repeated survival statistics: Only about a third of startups survive to celebrate their 10th anniversary, according to U.S. Census Bureau and Labor Department data, and only a quarter last until their 15th.
There are many ways to increase your company’s survival odds, but one of the easiest is to control your use of credit-card debt. Too often, entrepreneurs don’t make the best use of their accounts and end up hurting their businesses. Here are seven of the most common credit-card slipups to avoid.
1. Ignoring your personal credit standing: Credit-card issuers pull personal credit reports when making business-card approval decisions because to them, a small business is its owner. So, it’s crucial to try to maximize your personal credit score before applying for a business card. Start by visiting annualcreditreport.com and ordering a free copy of your major credit reports (Experian, Equifax and TransUnion). You can check for inaccuracies that could be dragging down your credit standing, as well as get a sense of whether there is any negative information that you will need to devalue to improve your score. The most efficient way to do so is to get a new personal credit card and either lock it away unused or pay your bill on time each month. This will relay positive information to your credit files on a monthly basis.
2. Leveraging credit too early: The numbers speak for themselves when it comes to the dangers of relying on a credit card to power a company through its infancy: For every $1,000 in credit-card debt that a small business takes on, its chances of long-term survival fall by more than 2 percent, according to a study from the Ewing Marion Kauffman Foundation. If you rack up a huge balance from the get-go, you will likely waste money on interest payments and won’t be able to reinvest in your company as freely as you might otherwise.
3. Being wed to only a small-business card: Most people assume business credit cards are the plastic of choice for small-business owners, but for purchases you won’t be able to pay off within a single billing period, you actually could be better off using a personal credit card. Credit-card issuers are banned from increasing interest rates on personal-card balances in the absence of 60 days’ payment delinquency, but this rule doesn’t apply to business cards. So, you could face unexpected higher interest charges if you carry a balance on a business card, potentially disrupting your cash flow and strategic plans. Using a personal card won’t affect your liability; you’ll be personally liable for your small-business spending no matter what type of card you use.
4. Overlooking rewards: Small-business credit cards have long offered unparalleled rewards on business-related expenses, and now, credit-card companies also are offering enticing initial reward bonuses on both business and personal cards to people with excellent credit ratings. You can garner hundreds of dollars in free cash or points, which can be used to score a free flight to visit an important client or help pay for a marketing campaign.
5. Paying interest: You can avoid credit-card interest payments by taking advantage of introductory zero-percent rates on both purchases and balance transfers. For example, the Citi Diamond Preferred Card offers zero percent on new purchases for 18 months, while the Slate Card from Chase offers zero percent on balance transfers for 15 months and doesn’t charge a balance transfer fee. If you currently have a $5,000 balance with a 15 percent interest rate and want to become debt free in 15 months, the Slate Card would save you $518 in interest fees and help you pay down the debt one month faster.
6. Not segmenting transactions: The rewards and low interest rates available today obviously provide value, but you won’t be able to take advantage of both using a single credit card. That’s why you should follow the "island approach" and segment your transaction types on different credit cards. For example, you can use a business-rewards credit card for everyday expenses and a zero-interest personal card for funding. This will enable you to reap the benefits of a business card but enjoy the debt stability of a personal card.
7. Failing to safeguard against fraud: The best way to ward off fraud is to exercise common sense. Avoid leaving important financial documents where employees can see them; it’s possible they could apply for financial accounts under your name or your company’s name. If you regularly deal with clients or vendors over the phone or online, always be careful when exchanging financial information. And keep an eye out for credit-card transactions for unusual amounts, which could be a sign of unauthorized account access.