Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

One way for a small business to begin building a credit history and raising its credit score is to open a business credit card, use it for purchases, and repay the charges on time and in full. There’s no shortage of companies offering business credit cards with enticing features, including first-year fee waivers, rewards points, and introductory interest rates. Credit card issuers can be willing to take a chance on extending credit to startup companies when other kinds of lenders won’t do so.

That said, even the best business credit cards carry some risk, and businesses can find themselves swimming in credit card debt. That’s when you need strategies to overcome business credit card debt.

In this article:

• Understand the risks associated with business credit cards
• Learn what to look for in the best business credit cards for small business
• Explore strategies to overcome business debt and stay in good business credit card standing

The Risk of Business Credit Cards

The primary risk of business credit cards is that when charges pile up, business owners can’t make the monthly payments. It’s more common than you might think. Every company incurs unexpected business expenses and slow periods that hinder the owner’s ability to make timely credit card payments.

Once the introductory rates expire on the best business credit cards, the interest charges can climb quickly. According to the Federal Reserve, the average annual percentage rate (APR) for a credit card as of August 2024 is 21.76%, which is likely much higher than a traditional bank loan. The charges racked up and unpaid during the introductory period can quickly snowball into a real problem.

When business credit card debt increases dramatically, using business credit cards to build a positive payment history can backfire. The job then becomes finding the fastest and easiest way of getting out from under the high-interest small business debt and getting on track to increase your credit ratings.

Overcoming Business Credit Card Debt

1. Prioritize Payments

When it comes to paying down your business card, the interest rate should be your guiding light. If you’re paying 21% annual interest on one credit card while other cards carry a 14% or 15% APR, pay down the card with the highest interest rate first. If you can afford more than minimum payments, you’ll get faster debt relief.

2. Run a Lean Organization

Now that you’re paying down your balances, start paying attention to your budget. Take a hard look at how you’re spending money every week. Are you ordering surplus inventory that a vendor sold you at a good price but that will sit in your storage room for months? Consider whether the savings were worth the financial investment when you have business debts you need to pay off. If you continue to incur high interest on a business credit card that you could have paid down instead, the deal that vendor gave you might not have been worth it.

While there is little you can do to change your monthly fixed costs, such as rent and electricity, you can control your variable costs like inventory. Keep inventory to the bare necessities, monitor your staff hours, and see if you can find new, less costly, sources of the goods and services you need to run your company.

3. Consolidate Your Business Credit Card Debt

If you have more than one card and are racking up finance charges, try debt consolidation by opening a new business credit card that offers balance transfers. Doing so can lower your payments and give you some extra time to pay off your debts. Some cards waive the annual fee, offer 0% APR for a certain period of time, and have little or no balance transfer charges.

Then, the task becomes paying off the debt on the new card. However, if you can slash interest costs and make prompt, regular payments, you will be on the right path to getting out of debt.

If you’re in a tough financial situation, you can also reach out to a credit card provider for debt management solutions and payment plans to help reduce your debt payments. It’s not a guarantee, but credit card companies would prefer you pay back what you borrow rather than go into bankruptcy.

4. Obtain a Small Business Loan

A debt consolidation loan can help your business become credit card debt-free. You’ll just have a different kind of debt. Still, small business loans often have lower interest rates than the top business credit cards.

If you opened a card that requires a personal guarantee, you will still be on the hook for the debts incurred, even if you’ve established an LLC. Small business loans usually have lower interest rates than business credit cards and can help you avoid this personal guarantee problem. If you have a good personal credit score, and your company has been in operation for two years and is showing revenue growth, you may qualify for a small business loan to help pay off that credit card debt.

SBA loans are a good option for borrowers with a solid credit history. While they take time to secure and come with some costs, you can lower your monthly payments

Some firms may qualify for a small business line of credit, which is a lump sum of cash that a company can draw against during lean times. The beauty of it is that the small business owner does not pay interest on the entire amount of the line. Interest is incurred only on the amount you utilize to pay other financial obligations.

Final Thoughts

Business credit cards often provide a financial lifeline during lean times for small companies – particularly at the startup phase. Managing them can be challenging when the reality of operating a business differs from your original plans.

Running a small business comes with surprises, and sometimes the surprises, like equipment replacement or a shortage of your key materials, can be quite significant. Covering these costs can be challenging, and using your credit card can help you cope. Business credit cards should be a temporary solution in such cases. Other types of financing, including small business loans and business lines of credit can provide better options.

Those who make regular, timely payments indeed take important steps towards operating efficiently and building their credit history. However, getting buried under an avalanche of business credit card debt can severely detour your path to profitability. Taking measures to get high-interest credit card debt under control is of critical importance to the future of your company. Follow the four methods above so you can get out from that pile of debt even faster.

FAQs

What is a business credit card?

A business credit card is just like a personal credit card, except that it’s used by a business for business purchases. Like a personal card, you must pay back the credit you use within the repayment period to avoid interest charges.

What is the average business credit card interest rate?

As of August 2024, the average credit card interest rate is 21.76%.

What should you look for in a business credit card?

The best business credit cards for small business offer competitive interest rates below the national average, 0% APR introductory periods, and the ability rebalance from other credit accounts. Generally, if you have good credit, you can qualify for better terms.

How can you pay off a business credit card?

If you’re deep in credit card debt, some good strategies to adopt include prioritizing paying off high-interest debt first, cutting business costs, rebalancing debt between cards, or exploring small business loan opportunities.

What are some alternative financing options to business credit cards?

If you’re concerned about credit card debt, some other funding options include traditional loan products like term loans or working capital loans, asset-specific loans like real estate or equipment financing, or alternative short-term solutions like merchant cash advances (MCAs) or invoice factoring.

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