The Business Credit Climate

Business loans were very hard to come by in the year following the global economic recession that started in 2008. Credit for small businesses is still tight, but approval rates have actually risen among small banks and non-bank business lenders. Many small business owners turn to credit unions, micro lenders, and Community Development Financial Institutions, which are more likely to lend money than are big national banks. Big banks cite continued uncertainty and a sluggish U.S. economy for their low business loan approval rates. Many small business owners turn to their personal credit cards to help with cash flow problems at their business. They do this for several reasons.

Why People use Personal Credit Cards for their Business

Many people simply have no choice but to use personal credit cards to smooth over cash flow hiccups at their small business. A number of small business owners believe, rightly or wrongly, that their chances of receiving a small business loan are small, and that getting such a loan would take too long. With some businesses, capital needs are relatively small, and it's easier to charge a new laptop or file cabinet to their personal credit card than to work out some other type of financing. But many small business owners take out small business credit cards to use instead of their personal credit cards. Business credit cards have their advantages and their drawbacks.

Advantages of Business Credit Cards

Around 65% of small businesses use business credit cards. Small business owners obtain business credit cards for several reasons:

• They make tracking expenses easy
• They keep business expenses separate from personal expenses
• Extra cards can be obtained in the name of key employees
• Some business credit cards have rewards programs
• They allow the business to conserve cash
• They often have higher credit limits than personal credit cards
• They can be used to build the business's credit rating

Disadvantages of Business Credit Cards

But business credit cards aren't always the answer. Disadvantages of business credit cards include:

• Higher fees than on personal credit cards
• Potential for employee abuse
• They do not have the same consumer protections as personal credit cards do under the CARD Act of 2009
• The business owner is still personally responsible for the debt if the business is not incorporated

How to Build a Credit History for a Business

If your small business is a sole proprietorship, consider the advantages of incorporating and obtaining a Federal Tax Identification Number. This allows you to treat your company as a separate entity apart from your personal identity. Apply for credit for your business after making sure all records, filings, and licenses are up to date and that your business phone number is listed in information directories. The best places to start applying for business credit are suppliers of things like office supplies and marketing materials. Like with personal credit, paying on time builds a positive business credit history. As your business's credit rating improves, you can stop using personal credit for cash flow and minimize risk to your personal credit.

Sources:

http://community.sba.gov/community/blogs/guest-blogs/industry-word/how-build-business-credit-your-start
http://www.thestreet.com/story/10788817/business-credit-cards-carry-disadvantages.html
http://smallbiztrends.com/2011/10/biz2credit-small-business-lending-index-reports-loan-approval-rates-dropped-big-banks-rose-smaller-banks-september-2011.html
http://sbinformation.about.com/od/creditloans/a/creditcard.htm
http://www.sba.gov/content/managing-your-business-credit