Finance for Small Businesses
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Owners of small- and mid-sized businesses are increasingly turning to credit cards to finance operations, while the use of commercial banks loans for financing is on the decline, according to a recent study.
A survey of 953 business owners found that credit card financing for these companies has almost doubled since 1993, up from 17.3 to 33.5 percent in 1997. Meanwhile, loans from commercial banks aren't being used nearly as frequently as a financing option, with small business use decreasing from 49.4 percent in 1993 to 37.8 percent in 1997. The findings were compiled by Arthur Andersen's Enterprise Group and National Small Business United, an advocacy organization.
"The significant decline in commercial loans raises concerns about how effectively companies are matching long-term financing needs with long-term financing instruments," says Richard Robbins of the Enterprise Group. "It is important for small- and mid-sized businesses to build strong relationships with their bankers to establish credit history--something that can't be done with credit card companies."
Moreover, going through the loan application process forces owners to more clearly plan their business operations, asserts Susan M. Jacksack, a small business and tax expert for CCH Tax and Accounting, and editor of the new book, Business Plans that Work for Your Small Business. Since owners have to convince a neutral party, the banker, to loan the money, the soundness and profitability of the concept is impartially judged. Jacksack believes that proper feedback from your banker can make this professional one of your most important business consultants.
But clearly, the trend toward credit card use is growing, and not only for business financing. Through February 1998, the Federal Reserve reports that American consumers were $1.244 trillion in debt, exclusive of home mortgages. So, if you must use credit cards as a way of financing your small business, there are a number of things to consider when choosing and using your credit card.
First of all, you need to be smart and search for the best deals. There's a lot of competition out there looking to secure your credit business, assuming your credit is good, so don't be afraid to negotiate and play one company against the next in order to get the most favorable terms. If the customer service representative you are dealing with refuses to budge, ask to speak to a supervisor. You may have to do this more than once, but eventually you'll find the person with the power to work out a deal. The worst that can happen is they'll say no. At that point, try another credit issuer.
Second, to negotiate properly, you must understand the fine print of the terms and conditions being offered. Among the credit card companies, slight differences in terms can add up to big dollars in fees for you. Pay attention to these items:
As you can see, there are many variables involved with credit card financing. Ultimately, this form of lending will end up costing the user more than other conventional options. Yet obtaining a credit card often can be easier than obtaining a bank loan. In addition, credit card debt is unsecured, unlike conventional loans requiring collateral that can be seized in case of default.
So, if you plan to finance your small business through credit card debt, be sure to explore all of your options. A good place to start is with the asQue Credit Card Rates Guide. There's quite a bit of competition for your credit dollars, so remember the first rule of business: "The customer is always right." Find an issuer that will work with you, the customer, to arrange the best deal for your particular situation.
Posted June 6, 1998.