Credit Card Debt: The Quiet Way to Kill a Business
Not all business debts are bad.
Using financing to lease an office, tackling the rising costs of healthcare benefits, or even borrowing money to buy a company car -- all can be good debts with high return values.
But there are bad debts, too -- debts that for entrepreneurs can limit or even prohibit cleaning up your student loan debt. Of those bad debts, few are worse for fledgling business owners than credit card debt.
Simply stated, credit card debt can kill your small business from a personal finance point of view. Massive credit card debt can also choke your ability to deal with all of your other financial responsibilities, taking over your life and limiting your business' ability to grow and prosper.
Business Owners' Reliance on Plastic
Credit cards are now the most common source of financing for America's small-business owners, according to the 2008 National Small Business Association survey.
The survey also notes the following:
That's not to say you shouldn't use a credit card -- it just means you should use one wisely.
Sure, taking a valued client to a five-star restaurant or expanding your office size are worthwhile pursuits as a business owner -- if you can afford them with what you bring home in profits from your company.
Here are some action steps to take to reduce credit card debt at your business:
But often, using a credit card to finance these endeavors is a long-term loser, if only because most of the stuff you buy with credit cards depreciates rather than rises in value. Those high-top Reebok basketball sneakers may look great in the box, but once you slap them on your feet, their value resides only in your mind's eye, because few others want them anymore. Unlike other depreciable items, like a car that provides vital transportation for your company or a pair of eyeglasses that helps your read legal documents, most things you buy with a credit card don't offer much to your personal bottom line.
STEP 1: Understand credit card debt
From your business' financial perspective, any money that is earmarked toward your credit card debt is money that you can't use to free your business from debt. That's the primary reason why credit card debt is invariably bad debt.
It's bad from a financial management point of view, as well.
Take student loan debt -- one of those examples of supposedly “good debt.”
Unfortunately, student loan debt and credit card debt are joined at the hip. For decades, credit card companies have targeted college students, offering them their first shiny new plastic card while downplaying the dark side of owning a credit card.
Well, that plan worked. Millions of young Americans who received their first credit cards in college (and millions more who didn't, but got them right after they graduated and earned their first job) have developed the nasty habit of using their credit cards with alarming regularity. In the process, younger Americans have put a real dent in their financial health and made it even harder to address their student loan debt.
It's the same idea with credit cards and small businesses. Once an entrepreneur gets that card in hand, it's tempting to use it for non-critical purchases.
To alleviate that issue, start racking your daily use of your card, and figure out what is critical and what isn't. Then start using the card for only those “critical” purchases.
STEP 2: Use a debit card
It's always a good idea to plan your spending on what you actually have in the bank. That's where a debit card can come in handy. Knowing you can only spend what you have you'll get a more realistic view of what is necessary to run your business. So ditch your credit card and start using a debit card.
STEP 3: Pay in full each month
Get in the habit of paying your small business credit card in full each month, no exceptions. That will keep you from falling behind on your credit card debt, which accumulates faster than the ivy grows at Wrigley Field. If you think you can't manage that, get an American Express Card. That card has to be paid off in full each month.
STEP 4: Watch the interest rate
Focus like a laser beam on your business card's interest rate. Credit card companies are crafty, and can up your rate for the slightest reason (like paying your card bill late or exceeding your card limit). Fight any uptick in rates, and always be looking for credit cards with lower rates and better rewards deals. Creditcards.com, for example, has a great database of card options for small-business owners.
Managing your business credit cards is one part diligence and one part creativity. Apply both liberally, and watch your credit card debt melt away.
Brian O'Connell is a freelance small business journalist who writes for Vistaprint, a leading provider of custom address labels, business cards and other marketing services to small and micro businesses all over the world. Brian has been a professional journalist for over 15 years, and his work has been featured in The Wall Street Journal, TIME and CNBC. Brian was formerly a Wall Street bond trader.