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In
addition to the financing methods highlighted in Section 3, those
seeking to start and fund a business can look to credit cards as an
alternative option. A credit card is a great financial tool. It can
be more convenient to use and carry than cash, and it offers
valuable consumer protections under federal law.
At the
same time, it’s a big responsibility. If you don’t use it carefully,
you may owe more than you can repay, damage your credit rating, and
create credit problems for yourself and your business that can be
difficult to fix.
Here is
some important information that may help you determine whether
you’re ready for credit financing, what to look for when you select
a company to do business with, and how to use your credit card
responsibly.
Establishing a Credit History
To
establish credit, consider applying for a secured credit card. It
requires that you open and maintain a bank account or other asset
account at a financial institution as security for your line of
credit. Your credit line will be a percentage of your deposit,
typically from 50 to 100 percent. Application and processing fees
are not uncommon for secured credit cards. In addition, secured
credit cards usually carry higher interest rates than traditional
non-secured cards.
Selecting a Creditor
Fees, charges, and benefits vary among credit
card issuers. When you’re choosing a credit card, shop around.
Compare these important features:
Annual Percentage
Rate (APR)
The APR is a measure of the cost of credit,
expressed as a yearly interest rate. Check out the “periodic rate,”
too. That’s the rate the issuer applies to your outstanding balance
to figure the finance charge for each billing period. If the card
offers a very low introductory rate, find out what the rate will be
after the initial period. Ask about other limitations on the initial
rate. For example, is it only for balance transfers, and not regular
purchases? Be aware that some companies have high penalty rates. For
example, if you’re late paying your bill, your rate may increase
significantly. Ask when the company may apply a penalty rate to your
account.
Grace Period
This is the time between the date of a purchase
and the date interest starts being charged on that purchase. If your
card has a standard grace period, you have an opportunity to avoid
finance charges by paying your current balance in full. Some issuers
allow a grace period for new purchases even if you don’t pay your
balance in full every month. If there is no grace period, the issuer
imposes a finance charge from the date you use your card, or from
the date each transaction is posted to your account.
Annual Fees
Many credit card issuers charge an annual fee
for granting you credit.
Transaction Fees and
Other Charges
Some issuers charge a fee if you use the card
to get a cash advance, if you fail to make a payment on time, or if
you exceed your credit limit. Some may charge a flat fee every month
whether you use the card or not.
Customer Service and
Other Benefits
Many issuers have 24-hour toll-free numbers and
hotlines. In addition, they may offer other benefits, such as
insurance, credit card protection, discounts, rebates, and special
merchandise offers.
Credit Card Use and Accout Types
While a credit card makes it easy to buy
something now and pay for it later, you can lose track of how much
you’ve spent by the time the bill arrives if you accounting is not
precise. Moreover, if you do not pay your bill in full, you will
have to pay finance charges on the unpaid balance. Additionally, if
you continue to demand credit while carrying an outstanding balance,
the existing debt can snowball. Failure to repay debt will tarnish
your credit report, which will then incur a heavy impact upon your
business. Three different account agreement types exist to choose
from:
Revolving
Agreement
In a revolving agreement, the account owner
pays in full each month or chooses to make a partial payment based
on the outstanding balance. Banks typically issue credit cards based
on a revolving credit plan.
Charge Agreement
In a charge agreement, the account owner
promises to pay the full balance each month, so that there are no
interest charges. Charge cards and charge accounts with local
businesses often require repayment on this basis.
Installing Agreement
A consumer signs a contract to repay a fixed
amount of credit in equal payments over a specific period of time.
Automobiles, furniture, and major appliances often are financed this
way. Personal loans usually are paid back in installments, too.
For more information about credit financing
visit these sites:
Entrepreneur. COM – The
ABC’s of Business Credit:
www.entrepreneur.com/money/paymentsandcollections/article76886.html
The Federal Trade
Commission:
www.ftc.gov
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Start
your business