How small business owners can use credit cards to stay afloat

As much of the world transitions out of what we hope is the worst of the COVID-19 pandemic, small business owners in the U.S. are beginning to anticipate better times. Cautious optimism is on the horizon. According to a July 2021 poll conducted by MetLife and the U.S. Chamber of Commerce, 55 percent of business owners surveyed believe the health of their business is good and 58 percent expect their revenue to increase in the next year. Only 8 percent cited access to credit or a loan as a challenge.

As your business adjusts to the new landscape, small-business credit cards can be a vital part of your success. When an emergency or opportunity arises, say the experts, pulling out the right piece of plastic makes a whole lot of sense.

Many small businesses have insufficient cash reserves

Just as savings are important to safeguard your personal budget, it’s wise to have cash set aside that can cover unexpected business expenses. Goldman Sachs released a survey in September 2021 that reveals 44 percent of U.S. small businesses have less than three months of cash reserves at their disposal. Without those funds, managing the wide span of unexpected costs can be stressful.

Gerri Detweiler, credit expert and co-author of “Finance Your Own Business: Get on the Financing Fast Track,” says business owners need to address insufficient cash issues long before problems arise. A general rule is to have three to six months’ worth of operating costs in liquid assets.

“How much you should have on hand depends on many factors, from your industry to the cycle of your business,” says Detweiler. “For example, many owners are shocked to learn that just because they have a great product, it doesn’t mean they get paid on time. A robust emergency fund combined with access to capital will help you weather the ups and downs of your business.”

But what can you do when you don’t have the savings and need to handle essential expenses? Business owners know that some costs can’t be put on hold until you’re flush with cash. Common expenses that can emerge unexpectedly include fulfilling purchase orders, buying raw goods for your products and making payroll when your own customers haven’t paid you for services and products.

While you work on building up that savings cushion, your business needs to be prepared to float those expenses while you wait for the money to flow in.

Making the most of business credit cards

“As we emerge from the pandemic, many business owners have found that their customers’ buying habits have changed,” says Brian Pifer, vice president of programs and research at Small Business Majority, a national nonprofit small business education and resource program. “[Business owners] are figuring out what will work, what doesn’t and how they can meet their capital needs. Credit cards can be helpful tools. Getting paid by vendors can take 30, 60 or 90 days, and credit cards can help fill the gap.”

Another reason you may want to charge when you don’t have all the cash to pay is a unique opportunity. You may want to act quickly to purchase something that will grow your business. With no time to waste, the card can replace savings you don’t have or that you should leave in the bank for other purposes.

A significant benefit of using credit cards is their accessibility, with no questions asked from a lender. “If you already have a credit card, there is no application, justifying or credit check,” says Detweiler. “Simply pull it out and use it.”

If you don’t have a business credit card on hand now, consider applying for one while your credit scores are good and your income is positive. There are plenty of business credit cards on the market and almost all have rewards programs so you can earn cash, miles or points when you charge.

Some have attractive welcome bonuses where you can earn a large amount of rewards after charging enough in the first few months of account activation. Others have introductory 0 percent APR for a fixed number of months, which means you won’t pay any interest on carried balances during that time frame. As you’re looking, concentrate on the card that suits your credit profile and company’s needs.

How to manage business card payments and debt

Whether you get a new card or will be using an existing one, prioritizing on-time payments of at least the minimum (ideally, more) can keep you out of ever-mounting debt and protect your credit rating.

“I think you should have at least two cards for your business; a charge card and a credit card,” says Detweiler. If you need to keep a balance for a little while, the credit card will be there for you. Charge cards don’t have fixed limits and tend to have high rewards programs, but you usually have to pay the entire bill by the end of the month. Having both at your disposal can act as a much-needed lifeboat when you need to stay afloat in uncharted waters.

However, the immediate accessibility of credit cards can be a double-edged sword. “With a credit card no one is looking over your shoulder to ensure you’re moving your business forward [and not] wasting your money,” says Detweiler. “You have to think about your return on investment before you charge. What seems necessary may really be a ‘nice to have’ that puts you into debt.”

Credit cards are best used when you’re certain that you can and will pay the entire credit card bill in full by the due date, says Pifer. But, of course, when you’re pressed for money and still have obligations to meet to keep your business afloat this isn’t always possible. At the very least, focus on making the minimum payments each time, on time, to protect your credit reports and scores against the damage delinquencies can cause.

“At the end of the day, high interest rates will negatively affect you,” says Pifer. So while credit cards can be a lifeline when you need to bridge a gap, they’re really for short-term borrowing.

“Eighteen months at the very longest,” says Detweiler, “but in most cases, you’ll want to pay the balance off in 12 months or fewer.”

If you apply for a new credit card with an introductory APR period, whether it’s to cover an essential big-ticket repair, the cost of inventory or to transfer existing debt from a high-interest credit card, it’s vital to make a plan. Calculate exactly how much you’ll need to contribute every month to pay off your balance before the promotional period expires and stick to it until the balance is paid off. This way you can make the most of that 0 percent interest rate deal to be back in the black before the rate increases and interest fees are added to the amount you owe.

Add loans and lines of credit as needed

Of course, credit cards aren’t the only products that can help you through a hard time. Banks, credit unions and online lenders issue business loans to qualified applicants. The money is available as a lump sum and interest is built into the loan and a portion of the payments. If a large business expense is looming and you need a year or longer to pay it off, a business loan is usually preferable to a credit card. The interest rates tend to be lower and the balance won’t impact your credit utilization ratio, which is a significant credit scoring factor.

Many banks and credit unions also offer business lines of credit, which give you flexible access to capital. You can withdraw any amount up to the credit line and interest accrues only on the balance. Lines of credit have draw periods, such as five years, when the funds can be accessed. Any debt not paid after that time is transitioned into a loan. Qualification and terms depend on your credit history and assets, as well as past and projected revenue.

“Having access to tools that you can manage will help you over the long-term,” says Pifer. “The SBA is still offering Disaster Loans through December 2021, with a 3.75 percent interest rate over a 30-year term. You can’t do much better than that. There are restrictions, but you can use it to pay off other debt.”

Another option is to ask a relative or friend for help. They may be willing to offer loans and become business partners, taking a share of the company’s proceeds when they come in again. Or they may act as a lender, where you repay in regular increments, with or without interest being added.

The bottom line

If you’re a small-business owner, the future may be looking at least a bit brighter than it has in the recent past. The key is to recognize that it’s not quite business as usual yet (and maybe ever). We’re all enjoying the opportunity for a little optimism, but it’s important not to get complacent. “We’re still in unknown territory with the Delta variant and customer buying habits may have changed forever,” says Pifer. Remain flexible and try to plan ahead as much as possible.