Right behind making a profit, cash flow is one of the most important considerations of running a business. When managed properly, credit is an extremely powerful tool not just in business but in life. In your personal life, credit can help you buy a house or a car. In business, credit can help you get through slow months or get you profit earning assets before you can afford them. However, if not managed properly, credit can be a bad thing and get you in a lot of trouble. Either way, your credit is very important to keep in good standing. It is easy to mess up but takes a long time to fix!
How I Learned about Credit
My big brother Dan buried himself into quite the hole when he was younger. He not only had his student loans, but he also had racked up lots of debt from a painting franchise he started back around 2006. While his painting franchise was not making money, he unknowingly started using credit to substitute for profit. This is a very fast way to drown in debt and NOT a healthy way to use credit.
What my brother was doing was floating debt on 0% APR credit cards. What I mean by this is he would jack up some credit card bills, then before they started charging interest, he would sign up for a new credit card with a 0% APR, do a balance transfer, and successfully avoid paying the exuberant monthly interest charges that banks charge on revolving debt for a period of time. He would then repeat this cycle. This, my friends, was my credit cards 101 class.
As you can imagine, this game did not end well for him, and he was only putting off the inevitable. Dan ended up bulking together all of his accumulated credit card debt and went to a debt consolidation company. The debt consolidation company negotiated his payments and interest rates, and eventually, he paid off all of his debt. Dan and I, later on, started up Two Brothers Painting together, and he is now the proud owner of a very successful 3mil+ painting company in Rhode Island.
Just to touch on the topic, PLEASE, make sure you know your costs and numbers before you start your business! You don’t want to go through the pain I watched my brother go through for his struggling early years. You can download our free pricing worksheet here.
Benefits of Financing
As a business owner, one of the best decisions that you can make it so get a business credit card. Whether you have a large or a small business, having a business credit card can help you in a variety of ways. Below are some of the main benefits of having a credit card specifically for your business.
- Access to Financial Flexibility & Cash Flow
- Helps to Separate Business and Personal Expenses
- Offers Rewards Such as Points & Cash-Back (see below)
- Can Help Boost Credit Rating & Doesn’t Affect Personal Credit
- You’ll Establish a Credit Score for Your Business under its FEIN
- You can Control Employee Spending
Types of Business Financing
Business credit cards have already been discussed above, but they are not the only way to get business financing. There are also SBA loans, personal loans, home equity loans, and even loans from your customers.
Business Credit Cards
Business credit cards are the obvious first option for obtaining business financing. Generally speaking, if your needs are short-term, credit cards are my favorite type of financing because they have a flexible limit and offer rewards. Your business probably spends more than the average person does, so you can get hundreds or thousands of dollars in rewards each month.
0% APR Credit Cards
This is the trick my brother told me about in the story above. I utilized this method up until just recently. Again, this is only a good way to obtain business financing if you are making money! Do not make the same mistake my brother did. This is how 0% APR credit cards work:
Many credit cards offer “0% financing” for 6, 12, 18, or sometimes even 24 months. Many cards will offer this as a signup incentive, and many credit cards will also send you these promotions periodically to existing cardholders if you are not using your card regularly.
The reason why I put “0% financing” in quotes is that it is only 0% if you do a balance transfer from another credit card as you don’t have to pay a cash advance fee.
If you want to use this method to get cheap cash, they categorize it as a cash advance which most cards usually charge a 2-3% fee.
In this instance, if you do the math out- they are not actually 0%– as you have to include the fee in the cost. So, as an example, a 12 month 0% APR card with a 2% cash advance fee will run you 2% APR per year, which is still cheap money! I used to use this trick in the winter months to float me through the times of low cash flow.
Cash Back Credit Cards
If you don’t need cash, and you have cash, it still makes a ton of sense to use a credit card. Specifically, a high cashback credit card like the Capital One Spark 2% Cash Back card. I use this card because it is the highest cashback card I could find, with unlimited 2% cashback on purchases. With other cards, you need to pick categories and stuff, or you can earn points, but it’s complicated. I prefer a simple, guaranteed 2% cashback on all purchases.
The second reason to use a credit card even if you don’t need cash is for the cash flow. No matter what, you always have 30 days to pay off your balance with no fees. If you are waiting on a big check from a client, it’s a nice buffer to have some flexibility as to when to pay your bills.
Personal, SBA, and Auto Loans
Loans are useful when you need longer-term debt service. You can get loans from the SBA. Loans are less flexible since you have to take out a certain amount for a certain amount of time, you cannot draw cash as needed.
Loans are better for financing than credit cards because generally speaking, they are going to be a lower interest rate. SBA loans are generally going to have a higher limit at a lower interest rate than a personal loan. However, if you don’t have the business history you may need to start out with a personal loan.
Another way to get business financing is by customer pre-pays. If you offer a discount or incentive for pre-paying for the season, you can establish better early-season cash flow. At 855RILAWNS we usually offer a 5% prepay discount. Our logic is that we don’t have to pay the 3% credit card fee charged to businesses. We essentially are paying a 2% APR to borrow the customer’s money for a year which is an unbeatable rate.
Lines of Credit
Lines of credit are just generally good to have open. You can draw from them whenever you want (without paying a fixed cash advance fee like a credit card). If you are short on payroll one week you can draw from your line for one or two days and just pay a couple of dollars of interest for the couple of days you borrowed the money.
One of the cheapest ways to borrow a large amount of money is through a home equity loan or line of credit. This line of credit is on your house (or business) and is also known as a second mortgage. Since you are essentially borrowing from your own equity, and the loan is secured, the rates are very low. You usually need to have at least 20% equity in your house in order to open a second mortgage on it.
Final Tips on Credit and Financing
I wanted to make sure I touched on some related side notes, that I made mistakes on and cost me years of my time:
- The first thing is, you should get a good understanding of how credit works. Read about it. Use a service like creditkarma to learn about how credit works and to keep an eye on your credit.
- Every time you apply for a card costs you 2 points on your credit report for about 3 years, so you should be aware of this. It’s not the end of the world, but you should be selective as to what cards you apply to. Don’t do what I did and apply to 5 cards at once to see which cards you get approved for; you will get declined for all of them, guaranteed.
- The second thing is, you want many open cards with low balances. The more available credit you have that you are not using, the better your credit! In general you want to use less than 30% of the available credit on any given credit card.
- Obvious things, like paying your bills on time has a strong effect on your credit score.
- Report your income. If you ever want to be able to buy a house or a building for your business, they are going to look at the past 2 years tax returns. It may be nice avoiding taxes with low income, but that is going to hit you hard when you go to get a loan from a bank. They only care what your tax returns say. And this may cost you two years.
- Finance things under your FEIN versus your social security number as often as possible. Many times, items financed under your FEIN with you personally listed as the guarantor will not show up on your credit report, ie vehicles. This comes in handy the next time you try to get a loan as the debt service is not considered on your credit application since it is not visible to the bank pulling your credit.