What are the Pitfalls of Business Charge Cards

Business charge cards are a flexible financing option. They allow business owners to immediately find the liquidity needed to make purchases or pay vendors. Most businesses use some form of charge cards to manage the flow of money. However, there are several important considerations to assure your business does not take on too much debt or pay too much for the financing. 

High Monthly Balances

Business charge cards permit you to allow your debt to revolve, meaning the debt can carry over to the next month. You will only be responsible for making a minimum monthly payment. This makes the loans extremely flexible; if you have a slow month, you can delay repaying the debt. However, this can also be a pitfall for borrowers who never pay down the balance. High monthly balances mean your interest will compound on the existing funds, driving up the cost of financing. Further, high balances can negatively affect your business credit score. Businesses that fail to pay off debt regularly often find themselves declaring bankruptcy when they have a weak financial year.

Missed Monthly Payments

When all else fails, it is essential to make the minimum monthly payment on credit card debt. Missing even one payment can drop your business's credit for years to come. In most states, a late payment stays on a credit rating for 2 years. Having a late payment on your credit history can preclude you from achieving loans in the future. This is especially important to avoid if you are looking for investors to assist your business. Your investors will see late payments as a sign you are not capable of handling your finances effectively, giving them a reason to walk away even if your profits are high.

High Interest Rates

Revolving loans tend to have much higher interest rates than installment debt. If your business took out a merchant loan or short-term loan to make the same payments it makes with revolving debt, your total cost of financing would be much lower. Of course, these financing forms are very rigid, which are the main reason businesses often prefer revolving debt as a flexible, permanent solution. These benefits come at the premium of much higher interest. You will also find it impossible to know the entire expense of the loan up front. The expense depends on a wide array of factors, and the financing can end up costing your business much more than you originally anticipated.

Variable Interest Rates

It is rare to find a business charge card with a fixed rate. More often, revolving debt is distributed with the potential for the rates to rise in the future. Your lender will notify you of any rate increases, and these increases cannot apply to purchases already made on the card. Variable rates still make it very difficult to anticipate the cost of financing over time. While you can stop using a card if the rate gets too high, you will still have to pay off the debt in full in order to totally close the credit line. 

Improve Your Credit Score - Free Consultation