Doing the credit card dance: using credit can help your business - just be aware of the pitfalls

Black Enterprise, Feb, 1997 by Sheryl E. Huggins

For entrepreneurs with bright ideas but no cash I flow, credit card financing can be an effective funding source. Frequently, it's the only means by which start-up ventures can obtain seed money, since they typically lack the two to three years of financial statements that banks and investors I often require.

But credit and charge card financing isn't nearly as simple as it sounds. It can be damaging to a business' long-term credit history if not done carefully. Of course, as is the case with personal credit cards, avoid the temptation to spend beyond your business' needs. Disciplined I use--along with careful timing and a plan to phase out your reliance on revolving credit--can I make credit and charge cards a useful business tool.

John Knight Smith, marketing education coordinator at American express, otters a few suggestions on the proper way to use a credit card and when it's most appropriate:

* Use a credit card for big-ticket items such as a computer or copier. Don't put little things such as office supplies on your card.

* Never do business using a credit card with a high interest rate. Try to get the lowest rate possible. If you can only get a high fee card, factor in how you plan to make payment arrangements.

* Don't seek more than you need in terms of credit limit, and don't use more than you need.

* Assign a purpose to your credit cards. The biggest way to create problems is to rush out and charge on your credit card. Just because you're putting it on credit doesn't mean you should make haphazard decisions.

* Prepare cost projections of when money will be coming in to pay the credit or charge card bill. Do you plan to make minimum payments? If so, you'll be paying a higher fee for the use of the card.

Another effective way to use your credit or charge cards is to time your transactions so they come at the beginning of a billing cycle. This is especially true, says Smith, when using a charge card, where the full balance is due at the end of each cycle. It's best, he adds, to give your business as much time as possible to collect on the receivables that will pay your bill.

Jim Hughes, president of Blue Chip Productions in New York City, knows firsthand the value of timing charges. "I've even had a vendor or two post-date when they charge to my card," says Hughes, whose business supplies promotional and private label baseball caps to such retail clients as Liz Claiborne.

He admits to nearly maxing out his $10,000 personal credit card to start Blue Chip. However, he cautions businesses about using revolving credit, which provides easy access to funding but can eat away at your cash on hand with high interest rates. He phased out his revolving credit card and switched to a charge card after 18 months of operation.

Keep in mind that too many credit card accounts can interfere with your ability to get a loan. "Along with evaluating your ability to pay back a loan, lenders look at your potential to run up more debt," says Kimberly Stansell, publisher of the Los Angeles-based newsletter Bootstrapping Entrepreneur. "So, if you have credit cards with limits of $5,000 each, you have the potential to run up $25,000 in debt."

For comparative information on credit and charge card interest rates, scan Bank Rate Monitor's Infobank Web site at http://www.bankrate.com.