Dec. 14, 2009
ABA Media Contact: Carol Kaplan
ABA OFFERS TIPS FOR SMALL BUSINESS OWNERS
Note to Editors: The American Bankers Association is releasing a series of white papers intended to assist small business owners navigate the new banking environment. The papers, written through the viewpoint of a former commercial banker, give small business owners a rare glimpse into how bankers think and are intended to help them develop a mutually beneficial relationship with a bank, prepare to get loans, and evaluate offers. The following is the fourth paper in the series.
HOW TO SELECT AND USE SMALL BUSINESS CREDIT CARDS
By Robert C. Seiwert, Senior Vice President and Director
ABA Center for Commercial Lending & Business Banking
1) Select a business credit card that fits your firm’s needs.
Consider the trade-offs when selecting a small business credit card. Some cards feature discounts on certain purchases or award points for certain airlines and hotel chains, but these rewards may come at a price: higher interest rates or annual fees. Make sure that the benefits outweigh the costs to your firm.
2) Evaluate the rates, terms and fees of competing credit card offers by asking:
a) Can the introductory rate be increased? If yes, when, and to what interest rate?
b) What is the effective interest rate (APR) on outstanding balances?
c) How are finance charges calculated?
d) What fees are charged? (e.g., annual card, over credit line, or late payment fees)
e) Under what conditions can the credit card issuer:
- Change the amount of credit available?
- Change the interest rate?
- Terminate the card?
f) What financial information does my firm have to submit and how frequently does it have to be
submitted to maintain my small business line of credit?
g) How are disputes between the credit card company and the cardholder handled?
h) How are disputes handled between the merchant and the cardholder handled?
i) What am I obligated to pay if my business credit card is lost, stolen or used by an unauthorized
j) What is the grace period before interest is charged on any outstanding balance?
k) Does the credit card allow my firm the capability to establish sub accounts in order to be able
to track business expenses by category (e.g., travel or office supplies)?
3) Don’t mix personal expenses with business expenses.
One advantage of having a small business credit card is to be able to segregate your business expenses from your personal expenses. This allows you to build up your business credit track record. If you mix personal expenses with business expenses, you will not be able to accomplish this important task. Mixing personal and business expenses can also pose tax issues for you and your accountant.
4) Understand that small business credit cards are primarily designed to help your firm manage its cash flow. They should not be used as a source of equity capital.
Many small business owners use their personal and business credit cards to fund intermediate and long-term expenditures. This is a big mistake because it violates a key credit tenet: matching the term of the financing to the term of the asset. Short-term funding needs (e.g., purchase of office supplies) should be supported by short-term borrowing facilities such as a small business credit card or bank line of credit. Intermediate or long-term funding needs (e.g., the purchase of equipment or permanent working capital) should be supported by a longer-term credit facility such as a bank term loan.
Appropriate uses for small business credit cards include:
a) Building a business credit history that is separate and distinct from your own.
b) Taking advantage of various rewards and discount programs offered by credit card companies
to lower the overall cost of key expense items (e.g., travel expenses, or office supplies).
c) Controlling and tracking employee expense accounts.
d) Taking advantage of the interest free grace period that occurs between the time a charge is
made on your credit card and the time payment is due.
5) Pay your credit card bill on time.
Borrowers who use debt wisely and pay it back on time receive the best terms from their financial service providers because they represent a lower credit risk.
6) Operate within your credit card limit.
Don’t assume that the bank will honor credit requests that are in excess of your established credit line. If you need more credit, ask your banker well in advance of your need for these additional funds. Your banker may have alternative ways to fund your needed expenditures that are better for your business than using your credit card.
Robert C. Seiwert is a Senior Vice President of the American Bankers Association. Prior to joining the ABA, Mr. Seiwert was a banker for over 30 years, serving as President and CEO of a high-performing community bank and Director of Commercial Marketing for one of the nation’s largest financial institutions.
The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation's banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $13.3 trillion in assets and employ over 2 million men and women.
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