The number of small businesses that fail in the first few years is frightening and only about 33% of any new businesses will make it to their 10th anniversary. In almost every case the closure is due to financing problems and most of the time they could have been avoided.
There are many ways to increase your company’s chance of survival, but one of the easiest is to reduce your reliance on credit. Quite often entrepreneurs don’t make the best use of their accounts and they end up hurting their businesses.
Here are the most common credit-card mistakes and how to prevent them.
1. Neglecting your personal credit standing:
Credit-card issuers will review personal credit reports when deciding whether or not to approve a business-card, since the owner is ultimately responsible for the business’s success. It is beneficial to maximize your personal credit score before applying for a business card. The most efficient way is to get a new personal credit card and lock it away unused or pay off your entire balance off each month. This will help increase your positive credit rating.
2. Leveraging credit too soon:
If you charge a huge balance in the beginning, you will end up wasting a significant amount of money on interest payments and you won’t be able to reinvest in your company as freely as you would if you had a more flexible cash flow. Only rely on credit when other options are not available.
3. Paying high interest:
You can avoid credit-card interest payments by taking advantage of introductory zero-percent rates on both purchases and balance transfers. High interest rates will crush a new business, if you are relying on credit to get by until the receivables start to come in. Evaluate your choices to make sure you are getting a card that will work for you.
4. Overlooking rewards:
Small-business credit cards offer impressive rewards on business-related expenses for entrepreneurs with excellent credit ratings. You can earn hundreds of dollars in free cash or points that can be used for a free flight to visit an important client or help pay for a marketing campaign.
5. Relying on only a small-business card:
Most people assume business credit cards are the right choice for small-business owners, but for larger purchases, you may be better off using a personal or supplier credit card. Credit-card issuers are banned from increasing interest rates on personal-card balances unless there is a 60 day payment delinquency. This rule does not apply to business cards, which means you could face unexpected higher interest charges on a business card. Using a personal card also won’t affect your liability, since you are personally liable for your small-business spending no matter what card you use.
6. Failing to protect the business from fraud:
The best way to ward off fraud is to exercise common sense. Avoid leaving any financial documents where employees may see them to prevent them from applying for accounts or credit using your company’s name. Always be careful when exchanging financial information when dealing with vendors online or over the phone. Make sure to review your credit card statements each month for unauthorized charges.
The best way to avoid these issues is to reduce your reliance on credit completely. Work with your clients to get paid faster by using a proven invoicing system. Send invoices out as soon as possible and follow-up with a professional reminder notice. The fastest you get paid, the less you will need to rely on credit.