Credit cards can be crucial for a small business, but they need to be handled carefully. To help guide entrepreneurs toward profitable decisions, WalletHub turned to Julio Sevilla, an assistant professor of marketing in the Terry College.
A sample from the full interview is reprinted below.
How important are credit cards to small business owners?
If used appropriately, credit cards can be a very valuable asset for small business owners due to several reasons. First, they may be a useful credit line for small businesses to start and finance their operations. One of the main impediments for small firms to start, operate and grow is the lack of access to capital. While it may not always be easy to get a business loan, especially at the beginning, it is certainly easier to get a credit card.
Second, successfully handling a credit card for several cycles, that is, making significant expenditures and paying them in full at the end of each month, can help business owners build a strong credit record and to establish their firm at the beginning, which may open doors for them to get access to more formal financing, either through loans or investors. Credit cards can provide that seed money that may allow a business to take off.
Third, the competitive landscape in the credit card business these days has created attractive rewards programs for consumers to choose from. If a business is operating itself and its credit cards successfully, then the owners can benefit from meaningful rewards, due to the potential high volume of their expenditures but also due to the variety of purchases they may make, that may be better taken advantage of by using the right set of credit cards that will help them maximize their rewards.
What are the best ways to use a business credit card?
Credit cards can be a double-edged sword, since, as explained above, they can be a "game changer" source of financing. However, the relative easiness to get access to several credit cards simultaneously means that a business owner may be able to get credit for tenths of thousands of dollars. If used the wrong way, this may lead to accelerated indebtedness and financial duress, due to the high principal and interest rates that may be accrued.
A common mistake business owners may make is to continue to finance a flawed operation with credit cards. Being realistic and identifying that a business is bound to fail early enough can be very beneficial for the owner's long-term financial health. Operationally, like individuals, owners must try to pay off their credit cards in full at the end of each cycle and avoid carrying principal from month to month as this suggests they may be subsidizing a suboptimal enterprise by accumulating a sizable principal plus interests.