Over the past couple of years, the credit card industry seems bent on shaking up the credit markets so that it comes out in their favor. For small business owners with business credit cards, there has been virtual tidal wave of often unexpected changes- from cut credit lines to closed accounts- that seems to blindly strike irregardless of credit score and payment history.
If you use a business credit card extensively for short-term financing in your small business, then take heed to the following tips:
1. Expect the unexpected. These days, even if you have sterling credit and you’ve been using the same credit card for several years, you shouldn’t take your credit limit for granted. There are countless stories of business owners who watched their credit line virtually disappear without warning or provocation. Thus, pay attention to your account.
2. Be aware of what can trigger a change. There are several common factors that can result in a reduction of available credit: a sudden, significant change to your credit score, a large unusual purchase, “too much” activity (i.e. you keep using the card so you end up staying close to your current credit limit), and “too little” activity (i.e. you don’t use the account so often).
3. Have a backup plan. If you are using your business credit card heavily and/or are dangerously close to your available credit limit, then consider using either a backup credit card (just make sure to make a few charges with it so it shows recent activity) or secure another means of quick, short-term financing, such as business cash advances and accounts receivables financing.
In short, with a little effort and due diligence you can stay one step ahead of any unexpected curve balls your credit card company may throw you.
As the US economy still labors under a sluggish recovery, countless small business owners across the nation have experienced a sharp decline in their business credit scores. Chalk this up to a combination of poor sales and a growing pool of cash-strapped customers struggling to fulfill their financial obligations.
Fortunately, there are several steps business owners can take to remove, or at least minimize, the debilitating effects the economic turmoil has had on their credit. Business owners should keep in mind, however, that cleaning up a credit report takes time and work. There are no quick fixes to rebuilding good credit.
That said, here are several steps small business owners can take to clean up their credit record:
- Separate your business credit profile from your personal credit. If you haven’t already done so, make sure your business has its own credit rating and history. Many business owners are unaware of this option, especially if they are running a sole proprietorship, and they finance their businesses with their own credit and assets. This can be a costly mistake, since your personal credit profile will then directly effect your business credit, and visa versa.
- Make it a priority to pay all your bills on time. Making payments in a timely manner will have a significant impact on your credit score. While old negative credit entries can blemish your credit score, grater weight is generally placed on more recent financial activity. After seven years most of those detrimental entries will be deleted from your credit history.
- Make use of a small amount of your credit. One factor that significantly affects a credit score is the debt-to-available credit ratio. Most money managers and financial experts recommend staying below 30% or a maximum 50% of your credit limit.
- Make an effort to pay off as much debt as possible. Don’t hold back on paying your old, outstanding debts, including business and student loans. Widening the gap between your debt and your available credit shows that you are handling your obligations responsibly.
- Don’t be tempted to close too many credit card accounts. In an effort to clean up their credit, many make the mistake of immediately closing all their credit accounts after paying them off. But this practice may actually end up hurting your credit record because your debt-to-credit ratio will be affected. It is thus advisable to be deliberate in deciding which accounts to close and which ones to leave open.
- Seek out transactions that will improve your credit score. Specifically seek out those arrangements that will rebuild your business’ credit history and reputation. You can find out which businesses report to the major credit agencies D&B, Experian, Equifax and TransUnion, and make it a point to do business with them and to keep your payments on time. The credit reporting agencies, Ex themselves also a number or credit-building services for a fee.
- Try to negotiate a lower interest rate on your credit cards. The interest rate you are paying on credit accounts determines the size of your debt and how much you owe when you carry a balance on your credit card. It pays to look into the interest rate on your credit card and to “shop around” in order to get the best deal possible. If you decide to stay with your current credit card company, try to negotiate a better deal for yourself.
- Re-evaluate your spending habits. This seemingly innocuous tip is the most important of all: If you really want to clean up your act, change your spending habits. For small businesses, this generally translates into better cash flow management: effective debt collection, monitoring payables and receivables, and good inventory management.
This post is the third of a four-part series on credit card reform.
The consumer reaction to the credit reform bill has been taking the spotlight ever since the legislation was approved by the US Senate two weeks ago. Though the changes proposed in the new legislation will have some effect on consumer credit card usage, the under-emphasized fact is that smaller businesses (particularly those in retail) stand to bear the brunt of the fallout.
What makes small businesses special is that they are involved with credit cards both as a source of quick financing and as a way to extend credit and convenience to customers.
There has already been movement among the major business credit card issuers to drop their small business customers, or at the very least raise interest rates while reducing credit limits. My guess is that after the legislation goes into effect small businesses with good credit will see their rates continue to rise (albeit with greater disclosure) while their credit limits will continue to shrink.
Many of the “riskier” small businesses- those with bad credit and poor sales, or even those who have missed a couple of payments (how many small businesses out there these days don’t fit into this category?)- will have their accounts closed. In other words, they’ll just be dumped.
On the other side, the credit reform bill may result in a reduction in consumer spending by encouraging credit card holders to use cash or other credit card alternatives. Moreover, we can probably expect an increase in fees charged to retailers for processing credit card transactions.
None of this is good news for small businesses.
So what can small businesses do in response to the new credit card legislation? For one, small businesses must pay attention to any changes in credit card fee structures and incentives programs and then tailor their own credit terms and business practices around them. They should also look for alternative sources of quick financing, such as factoring receivables or turning to a community bank. It may take a little work, but it could shield a business from all the fallout.