One way for a small business to begin building a credit history and raising their credit score is to open a business credit card, use it for purchases, and repay the charges on time and in full. There’s no shortage of companies offering business credit cards with enticing features, including first-year fee waivers, double rewards points and introductory interest rates. Credit card issuers are often willing to take a chance on extending credit to startup companies when other kinds of lenders won’t do so.
The danger, of course, is that when the charges keep piling up business owners can’t make the monthly payments. It happens all the time. Every business incurs unexpected expenses and slow periods that hinder the owner’s ability to make timely credit card payments.
Once the introductory rates expire, the interest charges can climb quickly. According to credit ratings agency Experian, the current average annual percentage rate (APR) for a credit card is 16.81%, which is much higher than a bank loan. Thus, the charges racked up and unpaid during the introductory period can snowball quite quickly into a real problem.
When business credit card debt increases dramatically, the strategy of using business credit cards to build a positive payment history can backfire. The job then becomes finding the fastest and easiest way of getting out from under the high interest debt and getting on track to increase your credit ratings.
Overcoming Business Credit Card Debt
1. Prioritize Payments
One of the best tips for paying off just about any credit card starts with the interest rate it carries. Keep a record of the interest rates on your business credit cards (if you have more than one) and try to pay down the higher interest cards first. Retail store credit cards frequently offer 0 interest on purchases made during the first six months to a year… followed by an APR of 19% or more once the introductory offer has run its course! On the personal side there are many gurus who have different things to say about how to pay off these high rate debts. But when it comes to paying down your business card, the interest rate should be your guiding light. If you’re paying 21% annual interest on one credit card while other cards carry a 14% or 15% APR, pay down the card with the highest rate first.
2. Run a Lean Organization
Your business didn’t get into credit card debt all by itself – it took some serious spending to reach that point. Now that you’re paying down your balances, start paying attention to your budget. Take a hard look at how you’re spending money every week. Are you ordering surplus inventory that a vendor sold you at a good price but that will sit in your storage room for months? Consider whether the savings were indeed worth the financial investment at a time when you have debts you need to pay off. It’s all about understanding cash flow. If you are continuing to incur high interest on a business credit card that you could have paid down instead, the deal that vendor gave you might not have been worth it.
While there is little you can do to change your monthly fixed costs, such as rent and electricity, you can control your variable costs like inventory. Keep inventory to the bare necessities, monitor your staff hours, and see if you can find new, less costly, sources of the goods and services you need to run your company.
3. Consolidate Your Business Credit Card Debt
If you have more than one card and are racking up finance charges on several of them, try consolidating your debt by obtaining a new business credit card that offers a deal on balance transfers. By doing so, you can potentially lower your payments and give yourself some extra time to pay off your debts. Some cards waive the annual fee, offer 0 percent APR for a certain period of time, and have little or no balance transfer charges.
Then the task becomes paying off the debt on the new card. Obviously, if you make inconsistent or late payments on the new card, you will have done little to help your cause. However, if you are able to slash interest costs and make prompt, regular payments, you will be on the right path to digging out of debt.
4. Obtain a Small Business Loan
If you opened a card that requires a personal guarantee, you will still be on the hook personally for the debts incurred, even if you’ve established an LLC. Small business loans usually have lower interest rates than business credit cards and can help you avoid this personal guarantee problem. If you have a good personal credit score, and your company has been in operation for two years and is showing revenue growth, you may qualify for a small business loan to help pay off that credit card debt.
SBA loans are a good option for those who have a solid credit history. While they take time to secure and come with some costs, you can lower your monthly payments to address the high interest debt and stretch the payments out over time so that your company can grow. Banks and other lenders are approving record numbers of SBA Loans because the funding comes with government guarantees that minimize the risk for the lenders.
Some firms may qualify for a small business line of credit, which is a lump sum of cash that a company can draw against during lean times. The beauty of it is that the small business owner does not pay interest on the entire amount of the line. Interest is incurred only on the amount that you utilize to pay other financial obligations. Small business owners often find success in securing lines of credit from banks with which they have previously existing relationships, including business checking accounts.
The Bottom Line
Business credit cards often provide a financial lifeline during lean times for small companies – particularly at the startup phase. Managing them can be a challenge when the reality of operating a business differs from your original plans. Running a small business comes with surprises, and sometimes the surprises, like equipment replacement or a shortage of your key materials, can be quite significant. Covering these costs can be challenging and using your credit card can help you cope. Business credit cards should be a temporary solution in such cases. Other types of financing, including small business loans and business lines of credit can provide better options.
Those who make regular, timely payments indeed take important steps towards operating efficiently and building their credit history. However, getting buried under an avalanche of business credit card debt can severely detour your path to profitability. Taking measures to get high interest credit card debt under control is of critical importance to the future of your company. Follow the four methods above so you can get out from that pile of debt even faster.