Starting up a business is expensive. You have one-time payments that are larger and will not be a part of your normal operating budget, such as when you secure your lease on your office, purchase equipment or purchase your initial inventory. According to the Small Business Administration, 13 percent of startups in 2017 used business credit cards to fund their initial operations, while 7 percent used personal credit cards.
The SBA figure may not even take into account the small businesses that are independent contractors and freelancers.
Why Business Credit Card Debt is Not Good for the Long Term
The Balance found the average business credit card interest rate for October 2019 is 20 percent. Other small business owners either have not applied for business credit cards or do not qualify. Some of them have funded all or part of their startup with personal credit cards. The average interest rate for October consumer credit cards is just under 22 percent.
At such excessive interest rates, it is really tough for small business owners to pay down the debt. They are mostly servicing the interest and not paying down much of the principle. The payments are also excessive. This hurts the long-term cash flow of your small business.
A really helpful tool is found on Nerdwallet. This allows you to plug in your balance and interest rate on your credit card and play with payment numbers to see how long it will take you to pay down the debt.
Here at Grand Canyon Advisors, a firm that has solutions for small businesses and consumers who are having trouble with debt, we get a lot of calls from small business owners who have had to finance their startup with credit cards and are beginning to drown in debt. The following are some steps to help you dig your small business out of credit card debt.
Create a Formal Budget
In 2018, Small Business Trends reported that 61 percent of all small businesses do not set and follow a formal budget. Of companies that have 10 or fewer employees, 74 percent do not have a set budget. The problem is that expenses can easily get out of hand with no set budget. Then, you may find yourself using the credit card more and more, racking up more debt at high-interest rates.
Reduce Unnecessary Expenses
According to Entrepreneur Magazine, when you are under the spell of servicing high-interest debt payments, it is best to lower expenses until you can get the cards paid down. Entrepreneur suggests saving expenses by allowing employees to work remotely, considering work-share spaces and purchasing second-hand equipment. Any money you can save can go to pay down the debt, which will increase your cash flow over time.
Pay the Highest-Interest Debt First
In order to get out from under that double-digit, interest rate paid each month, you have to prioritize the card with the higher interest rate and pay that one off first. That will entail only making the minimum payment on the other cards until the one with the highest interest rate is paid off.
Lower Your Interest Rates
If you are able to substantially lower the interest rate you are paying, you will be able to attack more of the principle. There are two main ways of lowering interest rates.
Zero-Interest, Balance Transfer Credit Cards
If you can pay the entire credit card balance off in 12 to 18 months with no interest rate charged, which is the term of a typical balance transfer card’s introductory interest rate, zero-interest, balance transfer credit cards are a good bet. Then, you will be free of credit card debt in short order.
Debt Consolidation Loans
If the credit card debt is larger and cannot be paid off in a year or so, a personal debt consolidation loan can get help set your business on a more solid footing. The interest rates for a debt consolidation loan are lower, and the repayment period is usually a few years. At the lower interest rate, your payments will be substantially lower as well. This will improve your cash flow immediately and allow you to entirely pay down the credit card debt in a prescribed period of time.
If your business is struggling under heavy credit card debt, call us at Grand Canyon Advisors. We have solutions for small business owners and consumers who are struggling under high-interest credit card debt.