In 2017, the U.S. Small Business Administration reported that about 27 percent of small businesses could not receive the credit they had applied for. Often, this kept them from growing their enterprise. The SBA also found that 46 percent of small business owners used a personal credit card to fund their business. The SBA also found that the majority of small business owners were not separating their personal and business finances.
Why the Trend of Funding Your Small Business With Your Personal Credit Card is a Bad Idea
According to The Balance, the average credit card rate for consumer credit cards in October of 2019 is around 22 percent. The average credit card rate for those who have business credit cards is not much better at 20 percent. One huge issue with such high-interest rates is the payment you will have to make each month that you carry a balance. The excessive interest rate payments harm your cash flow.
Another huge issue with personal credit cards for business use is that, if you become delinquent on your credit card, your business debts will have harmed your personal credit score. Even those that have business credit cards can fall into this trap because most business credit cards have a clause in the application that makes you personally liable for the debt you incur on the cards. Either way, your personal credit can be harmed if you default on business debt you place on your credit cards.
At White Mountain Partners, we field a lot of calls from small business owners who had to take on too much credit card debt and are struggling under the high-interest rates. The following are some tips on how to get your startup out of credit card debt.
Separate Personal and Business Finances and Create a Formal Budget
The first means of seeing your way clear of the debt is to evaluate your budget or create one. The vast majority of small business owners who have less than 10 employees do not have a formal budget for their business to follow. One important part of your financial planning is the balances and interest rates on all types of debt. Also, co-mingled personal and business finances make it really hard to see what profits your business is really making.
If your business is struggling under high-interest credit card debt, you will need to trim some fat. According to Nerdwallet, some ways to lower expenses include reducing office space, selling off unused equipment and sharing employees with non-competing companies. Co-working spaces and/or remote employees as opposed to leased office spaces is another option to get the monthly costs down while you pay down the credit card debt.
Nerdwallet also suggests temporarily reducing the time you are giving businesses to pay for your services. Also, you could even consider raising prices. If you are not doing so already, Nerdwallet advises that you actively engage with both satisfied and dissatisfied customers on Yelp and other social media. People are more comfortable in working with companies who are pro-active about their service and reputation.
Refinance Your Debt
If your cost-cutting and revenue-enhancing measures do not adequately allow you to pay off your credit card debt, the next step is to reduce the cost of borrowing. There are means of consolidating your debt that can lower your interest rate.
Zero-Interest, Balance Transfer Credit Cards
If you qualify for a zero-interest, balance transfer credit card, you will have a 12- to the 18-month window of time that you will be interest-free and can make larger payments on the principle.
Debt Consolidation Loan
If 12 to 18 months is not enough time to pay down the credit card debt, you can apply for a debt consolidation loan. Debt consolidation loans come with lower interest rates and usually have pay-off terms of a few years. This will lower your monthly payment as well, which will improve your cash flow. The other advantage of a debt consolidation loan is that you will have a set pay-off date for the loan. At the interest rates that the credit card issuers charge, some businesses and consumers stay in debt, paying high interest to the card issuer perpetually.
If high-interest credit card debt is harming the cash flow and liquidity of your small business, call White Mountain Partners today. We have solutions for small business owners and consumers who are drowning in debt.