If you’re like many Canadian entrepreneurs, you probably use a credit card to finance some aspects of your business. A report by the Canadian Federation for Independent Business (CFIB) suggests that 44 per cent of business owners rely on credit cards for financing.
“Credit cards are administratively easy to use, and that’s one of the reasons why banks recommend them,” says CFIB president Dan Kelly. But while charging purchases may be simple, using a business credit card isn’t problem free. Here are some common mistakes to avoid.
Not Switching to a Designated Business Card
Many entrepreneurs use personal credit cards to fund start-ups, and that’s not necessarily a mistake. “If nobody ever used their personal financial room to help get their businesses started, I think that Canada would have a lot fewer businesses than it does today,” Kelly says. However, you may run into trouble if you wait too long to switch over to a designated business card, or charge so many business expenses that your family savings are in jeopardy. Avoid this pitfall by transitioning to a designated business card as soon as possible, and keep your personal finances separate from business operations.
Ignoring Your Credit Score
Your credit score is a number that represents your history of meeting financial obligations for your business. The number is calculated by credit reporting agencies based on things like your business reports and corporate filings, ability to pay bills on time, and any third-party collection claims. A low score may make it more difficult for you to secure financing in the future, so it’s important to keep an eye on your record. “Sometimes things that go on your credit score are actually errors, so you want to make sure that everything on there is legitimate,” Kelly advises. Request regular reports from one of Canada’s two credit reporting agencies, Equfax Canada and TransUnion Canada, and contact the credit bureau immediately if anything is amiss. If your score is lower than you’d like, contact a credit counselor to discuss ways to improve it.
Making Minimum Payments
This is a lesson you’ve likely learned with your personal credit cards – making minimum payments can lead to expensive interest charges. Ensure you’ll have the cash available to pay off major credit card purchases as soon as possible. If you do need to carry a balance, seek out a low interest card or ask your bank about lower interest ways to finance your business.
Making Purchases for Points
Points programs can be helpful, particularly if you travel frequently for business. But Kelly warns not to overspend on your card simply because you want to collect more points. “What business owners quickly learn is that these reward points are not free,” he says. Along with an annual fee, some points cards may charge high interest rates that can negate the value of the reward. Use points programs wisely and choose a card that best suits the needs of your business in more ways than one.