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Use credit cards safely

Jul 01 2005

Business owners are increasingly using personal credit cards to fund their businesses, particularly when it comes to major purchases such as vehicles and equipment. But this could be a recipe for disaster.

So says Nick Hood, senior London partner at corporate recovery experts Begbies Traynor. Credit cards are an attractive method of funding a small business because alternatives such as bank loans, the Small Firms Loan Guarantee Scheme and overdrafts all require a lot of form-filling. All that's needed to use a credit card is a signature or PIN number, but business purchases made this way should be a short-term fix not a long-term strategy. Below Hood outlines some valuable advice on how to keep control of credit card spending.

Be absolutely rigorous about what and how much is spent on credit cards for business purposes. If they are used, ensure it's only for business incidentals not for essential items.

If you regularly use a credit card for business purposes, budget for this in your cashflow forecast, making sure you repay the bill in full each month.

Be wise and regularly review your cards. Take advantage of all the regular special offers such as interest-free periods or reduced APRs.

Be very careful about switching cards. Holders who change cards too frequently are now getting poor credit ratings, which makes borrowing more difficult. Many card issuers are prepared to offer attractive deals to existing customers, but this is not advertised widely so you may need to put in a request rather than wait to be offered.

If you have run up large debts on your cards on behalf of your business and are repaying at crippling interest rates, get advice immediately. You are better consolidating your loan with a single (reputable) lender on a more advantageous rate.

For sources of larger funding, speak to your bank, business angel or explore equity finance via a venture capital or private equity firm. Equity finance can offer the most efficient returns and spreads the risk among all shareholders, not just the owner-manager.

'Businesses fail for many financial reasons, but failure is rarely caused by something cataclysmic,' concludes Hood. 'Rather, companies go under because they should have addressed small and easily reversible problems sooner - they fail to foresee the danger of death by a thousand cuts. Remember that useful proverbs like 'take care of the pennies and the pounds will take care of themselves' have become an integral part of English idiom for a reason.'

(30/6/05)

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