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Credit cards and borrowing for business

by Peter Andrew

Do you own or manage one of the nearly 28 million small businesses in America? If so, you'd have been exceptionally lucky to have avoided some of the very nasty effects of the credit crunch, recession and slow recovery. Even long-established enterprises struggled to cope as revenues fell while overheads remained stubbornly high. Often staff had to be let go, but even that wasn't always enough keep companies profitable. Meanwhile, traditional borrowing became next to impossible, and many began to carry forward ever-rising balances on small business credit cards. That wasn't ideal, but such considerations become an unaffordable luxury when survival is at stake.

Small businesses turning a corner…

... Or possibly making a handbrake turn. Either way, there are finally signs that the small-business sector is regaining its old health and vitality. January's nonfarm private sector employment figures may have disappointed some experts (though Moody Analytics' chief economist described it as "sturdy," once the exceptional weather had been factored in), but small businesses created 43 percent of all the 175,000 jobs added that month, according to ADP, Inc. That was on top of the 317,000 new jobs small enterprises added in the last quarter of 2013.

Meanwhile, the Wells Fargo/Gallup Small Business Index found owners of these enterprises to be at their most optimistic for five years. When asked in January about their last 12 months' cash flow, 52 percent said it had been good. That compares with 46 percent who felt that way when the same question was posed in October 2013. Similarly, when asked about their future expectations for cash flow, hiring and revenue, there was significantly more optimism this quarter than last. At the same time, fewer reported problems accessing credit.

That last point was borne out by the latest data from the Thomson Reuters/PayNet Small Business Lending Index (SBLI). As its name suggests, this uses an index, which started out at 100 in January 2005, to measure the volume of new commercial loans and leases to small enterprises. That index topped 130 in December 2006, and plummeted to a low of 66 in June 2009. In December 2013 it stood at 121. The last time it was that high was in September 2007.

Borrowing and small business credit cards

This means that, providing you have a sound enterprise, your chances of getting a traditional commercial loan or lease are much better today than they have been for more than six years. Even if you were turned down as recently as March 2013, when the SBLI stood at 98 (remember, it was 121 nine months later), your chances of being approved are now much better.

So, if you're rolling significant balances forward on your small business credit cards, now might be a good time to try to switch to a more affordable form of borrowing. Just like its consumer equivalent, this form of plastic provides expensive credit.

At the time of writing, the IndexCreditCards.com Credit Card Rates Monitor shows non-rewards business credit card charging on average an APR of 14.99 percent, while their rewards equivalents come in at 15.31 percent. Nobody wants to be paying those levels of interest if they have any choice.

Using small business credit cards

Of course, none of this means your should stop using your business plastic. Just like your consumer cards, they bring convenience and often rewards. Moreover, they frequently have higher credit limits and lower rates than those mainstream cards, and usually provide sophisticated expense-tracking applications that can save many hours of boring and potentially costly admin.

You should, however, be aware that they do not bring many of the statutory consumer protections that your other cards do. Business products were specifically excluded from the Credit CARD Act of 2009, and last October BusinessWeek exposed the unfriendly terms of a card co-branded with the National Federation of Independent Business! This, as many others do, allowed the issuer to vary rates and fees unilaterally for the most minor infringement without any regard to proportionality, and to apply monthly payments to balances in ways that could increase the overall cost of borrowing. The CARD Act bans both practices for consumer products.

Certain credit card companies voluntarily provide business customers with some or all those protections not covered by the law. But you have to shop around to find them. While you're doing so, be sure to compare all the other features you want from your plastic, including:

  1. Low APR: Though only if you might roll forward balances. Otherwise you should never pay interest.
  2. Rewards: Ones that suit your business.
  3. Perks: These are often especially valuable to the business traveler, and may include concierge services and free access to airport lounges.
  4. Annual fee: One of these can often buy you richer rewards and perks. Do a cost/benefit analysis.
  5. Prestige: Do you want or need to impress your clients or customers with platinum (or black) plastic?
  6. Admin: Managing expenses can be a big and costly administrative headache. How good is the card at streamlining the process?

It looks as if life's soon going to be different -- and better -- for many small-business people. Make sure your cards match your new ambitions.

Published 03/03/14 (Modified 03/10/14)


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