Credit cards can be essential tools for small businesses, helping to manage cash flow, finance large purchases, and establish business credit. Building credit history for your company by responsibly using a business credit card can open the door to other types of financing to fuel business growth, including loans and lines of credit. But, using a business credit card is not without potential pitfalls. Without research and disciplined use, a credit card can become a financial mistake for a small business. We spoke with a number of industry experts and small business owners to identify the top four financial mistakes businesses make when using credit cards.
1. Not Maximizing Rewards
Many business credit cards offer reward points or cash back on certain types of purchases. Read the fine print and find the credit card that reaps the biggest rewards for your business' spending patterns. For example, if you have a large fleet of vehicles that fill up frequently, a card that offers triple points for gas station purchases might be best for you. Similarly, if you travel frequently for tradeshows or sales meetings, a card that offers airline miles or points toward free hotel stays could benefit your business.
"As a small business owner, every decision matters. When it comes to selecting business credit cards, you may think it's an easy decision. Utilize the 'free' credit card that your bank offers, and call it a day. But, you could be leaving money on the table," said Stacey Danheiser, owner of marketing consulting firm SHAKE Marketing Group. "Choose a credit card that offers rewards that matter to you. For example, do you like to travel? Then, check out credit cards that will earn you free travel. (Southwest Airlines and Starwood are some of the best.)"
2. Not Taking Advantage of Insurance and Extended Warranties
Many people don't know that, buried in the fine print, most credit cards offer travel insurance and extended warranties on certain purchases. If you experience an accident or some type of loss while traveling, or if something you purchased with the card is broken or stolen within a certain time frame, check out the paperwork that came along with your credit card to see if you can recoup some of the cost.
Ryan Chan, founder of software company UpKeep Maintenance Management, said, "There are plenty of rewards with credit cards, but most of all there is additional protection when purchasing goods with a credit card. Visa, MasterCard, and American Express offer an extended 30-90 day warranty for broken, lost, or stolen goods if purchased with a credit card."
3. Not Increasing Their Credit Limit
One of the reasons it's so important to use a business credit card is to build a credit history for your company. Even if you don't necessarily need to use the card, you should make a few small charges each month and pay them off on time to establish your credit history. Along the same lines, business owners should take advantage of increasing their credit limit whenever it's offered. Though you might not need the extra spending room immediately, you could (and likely will) need it as your company grows.
"A common mistake small business owners make is not increasing their credit limit when possible. It may sound unnecessary for some businesses, but the more you build your credit, the greater rapport you build with your bank, so when it does come time to expand (or when times are tough and you need to get through the month), your company will have a better chance at attaining loans," said Michael Haynes, a marketing consultant at CentripetalStudios.
4. Paying Fees and Interest Unnecessarily
Most credit cards offer zero-percent interest rate promotions on purchases made during a set period. Priyanka Prakash, a finance specialist at Fit Small Business, explained, "If you charge expenses to your card and pay the balance off in full during the promotional period, you're basically getting to borrow money for free. That's unheard of with any other financing product."
Prakash also noted that it is not mandatory for businesses to pay an annual fee on cards that offer rewards points. "Some cards give excellent rewards points, so paying an annual fee might be worth it in some cases. However, if your business can't afford an annual fee, then there are good no-fee options that still offer some rewards or cash back. A good example is Chase Ink Cash."
Business credit cards are beneficial tools to help small business owners finance essential purchases and build up business credit. If your business avoids making a common financial mistake, keeps balances low, and pays on time every month, you'll be able to enjoy the rewards of a healthy credit history as your business grows.