In the 1970s, consumer use of credit cards was a burgeoning phenomenon, one that would ultimately propel the growth of the American economy to unprecedented heights.

The use of credit cards from entrepreneurson the contrary, it did not even exist.

Except in my world.

I was a teenager in Nantucket when I started my first motorcycle rental company. It started with my customers paying all cash, but eventually, I managed to get a merchant account because credit cards were just coming into vogue. This was great for my business because it made it more convenient for my customers.

It would also become a powerful way to finance my purchase of additional inventory. As my clients started using credit cards, I personally was getting a lot of offers from credit card companies. Back then, they would mail them, and you just used them or chose not to. I remember one of the Visa cards had a $25,000 limit. I soon found out that I could process my credit card through mine trading account. If I timed it right, that gave me 55 days of interest-free money. I did this for months before it caught the attention of the FBI, who were called. It was a rude awakening and a warning of what would one day be outlawed by some credit card companies—namely, processing your personal credit cards through your merchant account as a way to raise capital for your business. .

While credit cards can be a valuable tool for business growth, it's also important for entrepreneurs to understand the risks and costs and best practices associated with it.

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So let's consider:

Risks and challenges of using a credit card

High interest rates:

Credit cards typically have higher interest rates compared to other types of financing, such as term loans or lines of credit. Businesses that carry balances from month to month can incur significant interest charges, which can lead to long-term debt accumulation and financial strain if not managed effectively.

Debt accumulation:

An over-reliance on credit cards for business expenses can lead to debt accumulation, cash flow challenges and financial instability. This is especially true if businesses exceed their credit limits or fail to make payments on time. High levels of credit card debt can have a negative impact credit scoresimpede access to future financing and make borrowing costs prohibitive.

Fees and Charges:

As we all know, using credit cards can subject an entrepreneur to various fees and charges, including annual fees, late payment fees, foreign transaction fees, and cash advance fees, to name a few. some. These additional costs can erode profitability, reduce the value of rewards earned and strains cash flow if not accounted for in the entrepreneur's budgeting and expense management.

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Credit card best practices – the fun part

Strategic spending:

Entrepreneurs should adopt a strategic approach to credit card use, streamlining essential business expenses, recurring invoices and high-impact purchases that contribute to revenue generation or cost savings. Prioritizing strategic spending, avoiding unnecessary expenses that drain cash flow, businesses can better maximize the value derived from credit card rewards and minimize the accumulation of debt.

Discipline of payments:

Maintaining payment discipline is critical for entrepreneurs. Doing so will avoid late fees, penalty rates and negative credit implications associated with missed or late payments. Of course, entrepreneurs should strive to pay off credit card balances in full and on time each month to avoid interest charges and maintain cash flow for growth initiatives.

Monitor credit usage:

Entrepreneurs should monitor their credit card utilization ratio—the percentage of available credit that's being used—to make sure they're not stretching their borrowing capacity or negatively impacting their credit scores. Keeping credit utilization below 30% of available credit limits can help businesses maintain healthy credit profiles as well as improve access to future financing.

Review the terms and conditions:

Before applying for or using a credit card for business purposes, entrepreneurs should carefully review the fine print, or terms and conditions. This may relate to interest rates, fees, rewards programs and liability provisions. Understanding terms and conditions can help entrepreneurs make informed decisions and mitigate financial risks.

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A note on the diversification of funding sources

Explore alternative options:

While credit cards can be a valuable tool for short-term financing and working capital needs, entrepreneurs should explore alternative financing options, such as business loans, lines of credit or merchant cash advances, which will optimize their financial strategy. Each financing option has its advantages, limitations and suitability based on business needs and objectives.

Build business credit:

Creating and building a strong business credit profile it is essential that entrepreneurs have access to favorable financing terms, secure higher credit limits and expand borrowing options beyond credit cards. By responsibly managing credit card accounts, making timely payments, and keeping credit utilization low, entrepreneurs can improve their creditworthiness and gradually increase their access to financing.

Something I've learned over the past five decades is that credit cards can play an important role in supporting small business growth by providing access to capital, convenience and rewards. However, entrepreneurs must balance the benefits of using a credit card with the risks of high interest rates, debt accumulation, and fees. By adopting Best practices such as strategic spending, payment discipline and credit utilization monitoring, entrepreneurs can use credit cards effectively to drive growth and mitigate financial risks.

Additionally, exploring alternative financing options and building a strong business credit profile can increase financial flexibility and resilience, enabling entrepreneurs to achieve their long-term goals and aspirations.