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When to Use Credit Cards

Before pulling out the plastic, consider all of your options.

You need money--and fast. Is there ever a good time to use credit cards for your business? There are many different perspectives on the subject, as well as other options for obtaining smaller amounts of money in the short term. Of course, credit cards aren't necessarily good or bad; it just depends on how you use them.

As you probably know, there are times in business when you're low on cash and have to decide the best way to get money quickly. Should you personally invest in the business, get a loan from a bank or other third party, or use your credit card? These are all viable and appropriate options, depending on the situation. So let's explore the options.

Using personal funds can be the least costly approach, but you want to make sure you don't drain your cash fund completely. If you use your personal savings, you can account for this as a loan to the business or an equity investment. As a loan, the business will pay you back the principal that you loaned plus interest. In essence, you're lending to your business, and you receive the interest income personally. The business gets to expense the interest.

Borrowing funds from a third party is a very common option when you're purchasing assets. Lenders tend to shy away from loaning money for operating expenses because once the expenses are paid, there's nothing to show against the liability on the balance sheet. You've increased your debt without an accompanying asset.

Operating notes or lines of credit can be a smart option for established businesses. Ideally, you should use these only short term when you need to pay your bills today and won't receive payment from your customers for a short time period. Lines of credit are not designed to be long-term loans; they are revolving loans. That means you'll often advance and pay back the loan frequently. Lines of credit are designed to cover the short term gaps between cash inflows and outflows. Lines of credit tend to have higher interest rates than your traditional term loans.

So if you're purchasing assets, your term loans are more ideal than lines of credit. The interest you pay on either type of loan will be a tax-deductible business expense.

Using credit cards can be advantageous when you're able to pay them off and not incur the high rates of interest. Cards that offer cash back and travel perks can be used for reducing future business expenses. The key is using the cards responsibly and not carrying high balances. Credit card rates can be quite high, and the finance charges can quickly get out of control. Ideally, you should use credit cards for monthly expenses and then pay them off in full at the end of the month. Carryover balances are what can get you in trouble.

However, credit cards companies will often offer incentives for short periods of time that carry lower interest rates than traditional loan financing. Be on the lookout for such opportunities.

The key is understanding the cost of borrowing the money and how it will affect your business. Whether you borrow from a lender or a credit card vendor, there's always a cost associated with using their funds. Before choosing a method, determine if the benefits of using their money outweigh the costs.

Pam Newman is a Certified Management Accountant, author and Certified QuickBooks ProAdvisor for Financial and Point-of-Sale software. She is also president of RPPC, Inc., which provides customized business development services.
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