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Predatory lenders use incentives like free business credit cards to lure new business owners into a cycle of debt. As soon as you register your new business name and open accounts, lenders will find you. New businesses need capital, and these offers are tempting. Think carefully before activating a card, though, because there are many signs pointing to hazards.
Credit Cards Are Never Free
You learned this lesson when you opened your first personal credit card, and the same thing applied with business credit cards. You are charged interest every time you use your card. When offers come from companies you do not have a relationship with, i.e. banks where you do not have an account, the interest rates will be higher. This is considered an unsecured loan because there is no collateral providing the lender insurance against default. Unsecured loans will always have higher interest rates. Those rates will throw your profits out the window. Even offers from your own bank will come with an interest rate you must investigate before using the credit offer.
Revolving Credit Disguises Expenditures
If you have an installment loan, like a small business loan, you know the exact amount you start with and can watch it decrease. Tracking your expenditures is as simple as seeing the amount of credit you have remaining. Many business owners have difficulty tracking expenditures with revolving credit lines which are periodically paid off or reduced through payments. Your total credit remaining will bounce around as you make payments toward what you owe. With a business credit card for $30,000, for example, you may end up spending $70,000 in a year by making irregular payments to stay below your maximum.
Too Many Business Credit Cards Will Ding Your Credit
Using your credit is essential for all small businesses. Use your credit, pay off your credit, and open new credit lines. But choose carefully. Accepting every offer for money that comes through the door will not build your financial stability or credibility. Whether you are taking loans or activating new business credit cards, those decisions will go on your credit report for at least two years and, many times, longer. When you apply for a loan from an FHA-insured lender, for example, they will not want to see you have three credit cards from no-name, out-of-state companies. They want to see you are wise in your choice of who to work with just as they are.
Secured Loans are Cheaper
Using revolving credit lines for business charges is more expensive than seeking funds through secured loans. Rather than using these "free" business credit cards, consider applying for secured business loans. By placing collateral, usually your business, you will be able to get lower interest rates and better options. Think long-term with your business finances. You will need a credit card at some point, but it should be a card you research and select based on the benefits it offers your business such as free shipping on business inventory or points toward office supplies. Accepting multiple credit card offers without research is not a proper financial practice for a successful business.
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