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The Right Way to Tap Personal Credit for Small Business Needs

NEW YORK (TheStreet) -- I'm going to let you in on a little secret: Small business credit cards don't protect you from personal liability. That's not all either: Issuers will also pull your personal credit reports when making approval decisions for business credit cards. In light of this and the fact that the CARD Act doesn't apply to business-branded cards, small business owners would be remiss in not considering use of a consumer credit card.

The trick is to strategically choose your credit card(s), as the best cards for your needs depend on what stage your company is in, your spending and payment habits, and the other cards in your wallet.

For starters, it's important to note that you should strive to avoid using a credit card to fund an early-stage company, as doing so actually decreases your odds of eventual success (which, as any entrepreneur knows, aren't great to begin with).

Roughly 60% of start-ups depend on credit cards during their first year, according to a study from the Ewing Marion Kauffman Foundation, and for every $1,000 in debt they rack up, their likelihood of survival falls more than 2%. When you consider that a failed venture fueled by credit card debt could negatively impact your family's finances, it's clear that seeking investors and sacrificing some equity is certainly preferable.


It's integral that you do leverage credit when your company is more established, however. Not only can a credit card provide an accessible second round of financing, but it will also help you track company spending, control employee purchasing power, and earn rewards that effectively subsidize everyday costs.

The best strategy is to use a consumer credit card for purchases that you won't be able to pay off within a single billing period and a business credit card for all others. There are a number of reasons for doing so, but perhaps the most important is the fact that the lack of CARD Act coverage for small business credit cards means that issuers can increase interest rates on existing debt whenever they want. With a consumer card they can only do so if you're at least 60 days delinquent, which gives you debt stability and makes it easier to allocate funds with confidence.

Small business credit cards are superior to their consumer counterparts for purchases that you pay for in full, as they typically offer much better rewards on business-oriented expense categories like office supplies and wireless services, give you the ability to set custom spending limits on employee credit cards (and appoint more authorized users), and provide account features specifically geared toward making the life of a small business owner easier.

Another advantage of using one credit card for funding and another for everyday expenses is that you can get a far better collection of terms than is possible with a single credit card.


For example, you could use the Citi Diamond Preferred Card to get 0% on new purchases for 18 months and the SimplyCash Business Card from American Express to score 5% cash back on office supplies and wireless services, 3% on gas, and 1% on everything else. It's called the Island Approach because you're segmenting different types of transactions on different cards like they're stranded on desert islands.

Now, there is an alternative for those of you who really don't relish the prospect of managing multiple credit card accounts. You can use a Bank of America business credit card. Bank of America (BAC) is the only major issuer that has proactively extended the CARD Act's protections to its suite of business cards, which means you can garner debt stability and the unique features of a business card all in one neat package. You're just not likely to get the best possible terms by limiting your options to one issuer.

At the end of the day, it's simply important that you recognize the potential benefits and pitfalls of credit card use as well as adopt a strategy that suits your personal preferences and the needs of your business.

More on credit cards for small business:

Card Hub's small business credit card study

--By Odysseas Papadimitriou

Papadimitriou is the CEO of Card Hub, a website that helps people find the right credit cards for their needs, and Wallet Hub, a new personal finance social network.

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