Signing up for a credit card can be as scary as signing up for a marathon– it’s a significant, long-term commitment that offers as many challenges as it does rewards. But, once you’re aware of how to negotiate the obstacles, a credit card can be an excellent tool to help keep your studio running smoothly.
If you’re already reliant on credit cards as a major source of financing for your studio, you’re not alone. According to the United States Small Business Administration, 65 percent of small businesses use credit cards on a frequent basis, in part because other types of financing have been more difficult to come by recently. Twenty-nine percent of small business owners report having their loans or lines of credit reduced in the last four years, and one in 10 were called in early by the bank.
Even without these incentives, credit cards can be the fastest and easiest way for your studios to secure financing, especially since more and more banks and card companies are expanding their small business card offerings. And if you’re looking for a line of credit in the long term, a credit card can be a good way to establish credit in a business’ name.
Having multiple credit cards can also be useful for tracking different expenses by division. For instance, one card can be for studio maintenance expenses, another for marketing, another for event costs. Each credit card bill acts as its own expense account and makes it easy to draw a distinction between the different divisions of your business.
Of course, opening multiple cards – or even just one – comes with serious responsibility. Many studios get stuck in a cycle of not paying the full monthly balance on their card, which is ALWAYS advisable whenever possible. Credit cards have much higher interest rates than most other lines of credit. If for some reason you can’t pay off the full balance and you have multiple cards, always check which card has the highest interest rate and pay that one down first. The larger your business is, the more money this will save you in the long run.
Another practice to steer clear of is opening a new credit card in order to pay down debt on another card. Not only will your credit score take a hit (making it more difficult for you to find a lower-interest rate loan or line of credit), but further financial troubles will undoubtedly follow as things spiral out of control.
If you’ve weighed the options and are ready to take the plunge, the first thing to consider is whether you want to apply for a business card or a personal card. Each comes with costs and benefits. For instance, consumer protection laws may not cover small business cards. That means you could get slammed with exorbitant late fees if you’re not careful. Most issuers aren’t sharks, but there’s no guarantee the way there is with personal cards. On the other hand, the limits on business credit cards tend to be much higher, and expenditures can add to your business credit score.
Either type of card can have significant consequences for your personal credit score: business credit cards generally affect your business credit, but they often require the owner to sign a personal guarantee, which means you’ll be liable for the company’s debt if you miss payments. Some card companies will report business activity to both commercial and consumer credit bureaus, although some will only report if you fall behind on your payments.
THE NEXT STEP IS TO COMPARE YOUR OPTIONS IN SEVERAL KEY AREAS
Fees: These are generally annual fees and are often attached to cards that offer extensive benefits. Cards with annual fees can also offer a longer payment grace period. Annual fees can be worth it, but you want to be sure you’ll take full advantage of the benefits.
Credit Limit: A high credit limit can be extremely important, especially if your studio is just starting up and you’re looking to make several large purchases.
Annual Percentage Rate: This may look like a little number, but even five percent of $50,000 will buy you quite a few yoga mats. Offers like zero percent APR for the first year can add up to serious savings.
Rewards or Advantages: These can come in all shapes and sizes. Many cards offer miles, for instance – but if traveling is not a big part of your budget, you’ll want to go with a cash-back card instead.
There are several websites that can help you analyze the benefits of various cards, but before you get to NerdWallet.com and convince yourself that Chase Ink Plus is the card for you, analyze your budget to see what kind of purchases you make. If one card offers amazing rewards at office supply stores that you don’t actually use, those rewards will seem less amazing once your studio is stocked with staplers but totally lacking in free weights.
The Chase Ink Plus Business Credit Card, for instance, is a great value for businesses with high expenditures, particularly on travel. On the other hand, there is a $95 annual fee, so you want to make sure the awards points are really worth it. Some of the other selling points:
Earn 50,000 bonus points after you spend $5,000 on purchases in the first three months from account opening (worth 25 percent more when redeemed for travel).
Five points per $1 you spend on office supplies, phone, Internet and cable TV services, up to $50k.
Two points per $1 you spend on gas and hotel stays, also up to $50k
Unlimited one point per $1 elsewhere
No foreign transaction fees
Free employee cards
$95 annual fee (except for the first year)
If you’re a smaller studio with less travel and fewer office expenses, Chase Ink Cash is a much better deal. It still earns five times the points, but only up to $25,000 per year. However, it does pay out in cash, which makes taking advantage of those rewards much easier.
There are six different Capital One Spark cards. Cash Select for Business offers cash-back rewards for no annual fee, plus 1.5 percent back on every purchase and a $100 sign up bonus. Miles Select for Business is similar except that it offers the sign-up bonus and the 1.5 percent in miles instead of cash. Plain ol’ Select for Business offers a longer zero percent APR period, giving you a little longer to pay things off, as well as mile rewards. The Classic for Business is great for studios that don’t have excellent credit, and it still offers one percent cash back on every purchase.
As long as you choose carefully and stay on top of your payments, credit cards can be a useful tool to keep your finances just as happy and healthy as your clients.