How small business owners are using credit cards to stay afloat

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By all measures, the majority of small business owners have been struggling since the COVID-19 pandemic hit the U.S. in early 2020.

Main Street America’s The Impact of COVID-19 on Small Businesses survey showed that 86 percent of small business revenue decreased by more than 75 percent. The U.S. Chamber of Commerce Small Business Coronavirus Impact Poll found that nearly 8 in 10 owners are concerned about the pandemic’s impact on their business.

Without their normal revenue stream, some small business owners have turned to credit cards to get by. There are advantages to this method—but it has to be done carefully. Other sources of funding may also be on the table, and it’s wise to explore the span of viable options.

Small businesses most affected by coronavirus

Almost all sectors have been negatively affected by the pandemic, but some have been particularly devastated. According to a report by the management consulting firm McKinsey & Company, small businesses involved in accommodations, food service and education, as well as any retailer considered nonessential, experienced the most extreme impact of the pandemic.

The combination of changed customer behavior, especially physical distancing, and mandated operational restrictions is to blame. Additionally, small businesses in stressed financial positions at the start of COVID were at a magnified risk of permanent closure.

For example, Marco Guanilo, owner of Momentum Fitness in New York City, has seen his income nose-dive. He’s been operating for 11 years, but the pandemic decimated his business just as it was ramping up for more clients.

“We had a pretty loyal following,” says Guanilo. “Based on that, we invested into a new location that was more than four times the size of our first studio.  We were just getting our bearings in the new space before COVID hit. We quickly dropped to about 10 percent of our usual income. Virtual classes and training helped a little bit but nowhere near enough to cover our overhead costs.”

Consumer insecurity rocked small businesses that depended on economic predictability, such as those involved in property sales. Tyler Fore is CEO of Felix Homes, a real estate startup based in Nashville, Tennessee, who says that listings are usually prolific during the early summer months, but this year almost nothing hit the market. “With increased uncertainly, people just weren’t moving,” says Fore. And no sales means no commission.

Even retailers that function entirely online haven’t been immune to the COVID-related downturn, says Ruggero Loda, founder of the Running Shoes Guru, an online store that reviews and sells athletic footwear to a global customer base.

“Thanks to the pandemic, most e-commerce businesses are paying reduced rates out to affiliates,” says Loda, who currently lives in the Netherlands. “This includes giants like Amazon. We had to work hard to find new affiliate partners outside of Amazon. All in all, it’s been a tough year for the small guys. We survived, but we also had to take several budget cuts to make up for reduced revenue.”

How credit cards are helping

Credit cards offer a way for distressed small business owners to pay their bills and keep doors open. “It all became a game of calculated decisions,” says Guanilo. “We started covering utilities and all the upgrades needed for reopening on the company credit card. Access to that minor stopgap helped us from letting our account go into the red on several occasions.”

To avoid overwhelming debt that would harm his financial situation, Guanilo weighs each charge to make sure it’s truly necessary before he makes the purchase. He’s also using the rewards advantageously. Instead of trading in the accumulated points for his annual family vacation, he’s using them to cover a portion of the company’s expenses, since he doesn’t foresee any travel in the near future.

Fore has been maximizing introductory rate credit card offers to minimize the effects of the downturn. One such card is the Chase Ink Business Unlimited℠ Credit Card, which offers 0 percent APR for 12 months with a variable APR of 13.24 percent to 19.24 percent after that. It also comes with a sign-up bonus of $500 after spending $3,000 in the first three months of opening the account. Fore is financing expenses at no cost during the introductory period and using the sign-up bonus to pay for some of his company’s bills.

As for Loda, he’s been relying on credit cards for their short-term, interest-free grace periods. He charges marketing tools, web hosting and SEO contractors, then has a month to pay before interest is added to the balance. “In all these cases, credit meant I could wait for the next affiliate payout to cover my bills without inconveniencing third parties,” says Loda. It’s about efficiently buying time.

All are smart strategies, says Zachary Weiner, a New York-based small business and startup expert. “I advise small businesses to use credit cards to better balance cash flow,” says Weiner. “But I have to warn people, too, that they’ll be personally responsible for the debt they get into. So, you have to be cautious. You don’t want to have a balance that’s outside your monthly sales.”

He recommends that owners ask themselves if the money to pay the balance or make the payments will really be coming in or if it’s just wishful thinking. Being realistic is critical.

“Consider charging as a due course of business, not as a last resort for financing,” says Weiner. “If you’re running in the red for a significant amount of time, a credit card won’t fix your problems. But if you need a month or two as a financial cushion, credit cards are great.”

And definitely think twice before taking a cash advance out for payroll or other large business expenses. Most credit card issuers charge cash advance fees, which can be up to 5 percent of the withdrawal. Moreover, the APR on cash advances is usually higher than for purchases, and there is no interest-free grace period.

Resources available to small business owners

There is no reason for small business owners to try to navigate the challenges that COVID has presented alone. SCORE, a national nonprofit network of expert business mentors who volunteer their time to entrepreneurs, developed a Small Business Resilience Hub. It helps owners find the right government resources and financial support.

Aside from using credit cards effectively (if they’re a sensible option in the first place), small business owners should explore other financing opportunities.

SBA Coronavirus relief options

The Paycheck Protection Program, administered by the Small Business Administration, closed in August 2020, but Economic Injury Disaster Loans are still being issued.

It includes an emergency grant of up to $10,000, which is made within three days of application. To qualify, small businesses must have sustained economic injury and be located in a disaster-declared county or contiguous county. The loan can be up to $25,000, payments are deferred for 12 months and the interest rate is capped at 4 percent.

Applicants need a credit history acceptable to SBA and for disaster-lending purposes (it’s generally defined as a history of paying creditors as agreed), unless otherwise justified. If the owner already has a business relationship with an SBA Express Lender, the Express Bridge Loan Pilot Program can provide access to the money quickly.

Business loans and lines of credit

Banks, credit unions and online lenders issue business loans to qualified applicants. The money is available as a lump sum, and interest is built into the loan and a portion of the payments.

Many banks and credit unions also offer business lines of credit, which give flexible access to capital. The borrower can withdraw any amount up to the credit line, and interest accrues only on the balance. Lines of credit have draw periods, such as five years, when the funds can be accessed. Any debt not paid after that time is transitioned into a loan. Qualification and terms depend on the applicants’ credit history, assets and past, as well as projected revenue.

Personal business loans

Then there’s the “think outside the box” option. Relatives and friends may be willing to help. They may offer loans and become business partners, taking a share of the company’s proceeds when they come in again. Or they may act as a lender, where the borrower repays in regular increments, with or without interest being added.

To keep their ventures running during this extraordinary time, small business owners may need to become especially creative over the short- and long-term. The pandemic is still in effect and will likely be a factor for months—and perhaps years—to come.

Pursuing professional guidance and obtaining the right financing is an essential component to survival. Through it all the wise use of credit cards can be a smart way to remain operating, while also building an exultant credit rating that will help with future borrowing opportunities.