Learn More About Credit Card for Your Business

There are many different types of credit cards available these days, and it can be difficult to know which option best suits your business. Answering a few key questions can help identify and prioritize your choices.

How strong is your personal credit rating? 

Most credit card companies will look at your personal credit rating even when you are applying for a credit card for your business. In fact, in most cases obtaining a business credit card requires the business owner to personally guarantee the balance will be paid. Thus, the higher your credit rating, the better credit terms you can expect to receive. A credit rating over 700 is ideal, but over 650 will usually suffice. Anything less will earn mixed results in the way of outstanding credit card offers.

Do You Want A Personal or Business Credit Card?
You can use a personal credit card for business, but if you do so, it’s advisable for tax and accounting purposes to restrict use of the card to business purposes only. If you use the card only for business, you’ won’t have to separate personal from business expenditure at tax time, and you’ll be able to deduct any interest that accrues if you don’t pay off the balance in full each month. For most very small businesses, the main distinction between the personal and the business credit card will be that the personal credit card may offer some protection against rates that suddenly change and other practices regulated under the consumer credit card laws.

Is there a particular store you shop most?
Maybe you’re a home improvement contractor who frequents a lumber supply store. Or, you’re running a desk-based business, and make frequent purchases at an office supply store. If the store you shop at offers a retail credit card, you may want to consider it. Not only will it consolidate monthly expenses into one bill, but it boosts your credit rating as well. Retail credit cards tend to approve cardholders more freely with fewer restrictions. If paid off each month, it can be a great way to prove yourself as a responsible cardholder and catch the eye of general credit card companies. Bonus: Your monthly credit card bill consolidates your tax records keeping, as most of these purchases will be tax-deductible and you will often earn customer loyalty reward points for frequent shopping. These in turn can be redeemed for “free” store merchandise or cash discounts on future purchases.

Do you plan to carry a balance?

If you do plan to carry a balance, or think there will be times when you won’t be able to pay off the entire amount at the end of the month, pay close attention to interest rates. The real value of any perks you gain (such as those discussed below) can be totally wiped out by the interest rates when you carry a balance for any length of time.

Do you fly a lot?
Frequent flyer cards can go a long way toward reducing business costs. Apply for either a co-branded airlines card or a general credit card that allows you to book travel with any airline. Seek a card that touts no blackout dates and always compare the fine print to locate the best deal.

Do You Prefer Cash Back or All-Purpose-Rewards Cards?
There are a number of credit card programs for personal or business use that have rewards programs. The programs let you accumulate points for each purchase, and then trade in the points for either travel (as mentioned above), gifts, gift cards, or cash back. These programs, in effect, let you earn money when you spend money, but they often carry a higher interest rate than credit card programs without rewards. They make sense, though, if you usually pay off most or all of your balance each month. If you opt for a card with a cash back rewards program, look to see if there is cap on the amount of cash back rewards you can earn per month or per year, and if so, what that cap is.

Do You Need A Credit Card With A Line of Credit?
Some credit card programs include a line of credit option for businesses. This option lets you write a check to anyone – even yourself- for an amount up to your credit limit. It’s handy if you occasionally need funds and don’t want to apply for (or can’t get) a separate bank line of credit. Before opting for this type of credit card account, be sure you know what fees, if any, you will be charged for using the line of credit.

Once you’ve decided on what (in addition to credit) you want from your card, look at the cards that have those features, and compare interest rates.

The right business credit card can offer business owners peace of mind and financial flexibility. Remember, though, that it’s very important, to pay attention to fine print items like APR, annual fees and credit limits.

Once you’ve gained approval for the right business credit card, ensure your payment is submitted on time and you keep your spending under limit. Failure to do so will result in astronomical interest rates and monthly charges, ultimately taking a toll on your business

New Crowd Funding Rules

How would you like to solicit investors for your small business using a Kickstarter model? In the past you were only allowed to seek equity investments from “accredited investors,” but thanks to the Security and Exchange Commission’s (SEC) new crowdfunding rules things will change in May of 2016.

Before we talk about the future, let’s look at the past. Previously, small business investing has largely been off limits to smaller investors. Let’s say that you were a startup looking for some cash to help get your new business off the ground. You could go to family or friends and ask for money or you could ask a bank, but getting a small business startup loan was – and is – difficult.

If you wanted to fund a certain project, platforms like Kickstarter and Indiegogo would let you seek donations for your project, but those who did donate money to you got no equity in your business. Instead of equity, you’d have to offer some kind of perks to encourage people to fund your project through donation-based crowdfunding platforms. Such perks might include anything from a free newsletter, to early access to the product, to trips to meet the project developers. The more valuable the perk, the higher the donation requirement to receive it.

Accredited Investors

Under the old rules, a business owner could use a crowdfunding model to find equity investors, but the crowd was quite small. Anybody investing in a small business had to be an “accredited investor”—somebody who has more than $1 million in assets not counting their primary residence. Or they have earned at least $200,000 for at least the past two straight years. Most business owners don’t know a large number of people who meet those rules—essentially the 1 percenters.

The New Rules

Making good on a promise it made late last year, the SEC revised crowdfunding rules to make it easier for investors with a smaller net worth to take a stake in a small business. But those rules also make it somewhat difficult and costly for small businesses to use crowdfunding to seek investors. They also limit the total amount of capital that can be raised this way, as well as limiting the percentage of their net worth that non-accredited investors are allowed to invest.

1. Caps on the Amount

Under the new rules a business can raise a maximum of $1 million in a 12-month period by selling shares of their business to the public (ie, non-accredited investors).

2. Must Use an Exchange

A business owner won’t be able to hop on Craigslist and start selling shares of their company in exchange for an equity stake. They will have to go through an accredited exchange, to offer equity stakes. Those broker-dealer model exchanges will collect all required documentation from the owner before offering the funding opportunity. Expect to pay a substantial fee for using the portals.

3. Unaccredited Investors

Good news, non-1-percenters can get involved in crowdfunding under the new rules. There are no minimum income requirements; however, the SEC has set these limitations on the total amount that can be invested by unaccredited investors in a 12-month period:

  • An individual whose net worth is under $100,000 can only invest either:

— $2,000

or

— 5% of the lesser of their annual income or net worth

  • If an individual’s annual income and net worth are both equal to or more than $100,000, they may invest up to 10 percent of the lesser of their annual income or net worth
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

4. Reporting Requirements

If you plan to solicit crowdfunding money, prepare to act more like a publically traded company. The SEC requires you to disclose the pricing information including the target offering amount, the deadline to reach that amount, and whether you will accept money in excess of your target. In other words, when an investor makes an investment, what will be the value of their equity stake?

Next, you have to provide information on your company’s financial health including information from your tax return and either reviewed or audited financial statements if this is the first time seeking funding under the new rules.

As part of the documents required for listing, a company has to provide the names of all officers, directors and people who own at least 20% of the company.

Finally, companies have to file an annual report with the SEC and provide it to investors.

Retirement Accounts

Small business owners may see interest from people holding a self-directed IRA wishing to invest through non-traditional means. It’s possible to invest in products outside of traditional stocks, bonds, and ETFs. Self-directed IRA holders have purchased property, for example, but the rules surrounding those purchases are vague. The IRS tells account holders what they can invest in but the list of prohibited investments is murky.

In the case of crowdfunding, the Unrelated Business Taxable Income rules or UBTI imposes an additional tax on tax-exempts like retirement accounts if they invest in income from operations of an active business. Most small businesses will fit that definition. Because the tax can be as high as 39.6%, using retirement funds to invest in crowdfunding activities will only be tax inefficient for a select few, according to experts.

Investors Are On Their Own

The SEC wants people to know that these investments are exceedingly risky. Startup owners may have little financial experience and because individual investors have to hold their investment for at least one year, there’s little liquidity to be found early on. There are no protections in place like the FDIC and any conflict would be settled in court

Learn More About Evaluate Credit Card

 

There are many credit card processing companies that offer merchant accounts that let small businesses accept credit cards in retail stores, on the Internet and even with a cell phone. But finding the right one for your company isn’t easy.

For starters, many banks won’t offer merchant accounts directly to small businesses. Instead, small businesses need to go through third party providers who secure the merchant account for you. Each of these third parties may have different fee structures and somewhat different rules.  

To complicate matters, if you are processing credit card orders online, the transaction has to pass through an online gateway system. Whatever shopping cart software you choose has to interface with these gateways. Not all shopping carts work out of the box with all gateways. Thus you need to be sure the shopping cart you plan on using will work with the merchant card provider you choose.

Rates and fees
Many factors can influence the discount rate and other fees you pay for the privilege of accepting charge cards. Among those factors: the length of time you have been in business, the percentage of your sales that are made over the phone or the Internet, the type of business you are in, the number of years you’ve been in business, your personal credit rating, the average dollar amount of each sales transaction, the total dollar amount of sales per month. Service fees tacked on by the third party providers or by their sales people, can also add to your costs.

Typically, however, discounts rates ranged from 2.25 to 3 percent for home and small businesses that accept mail order and phone orders. American Express and Discover Card usually charge a higher discount rate than Visa and MasterCard.

Some companies advertise discount fees less than 2 percent. Usually these lower fees are for swiped transactions (sales made by running the customer’s credit card through a machine). And, some credit card processors charge higher than average fees. Although poor personal credit or the type of business you run might possibly cause you to have to pay a high fee, do not agree to such a high a discount rate until you have personally determined that no other company will process your charges at a lower rate.

The discount rate isn’t the only credit card processing fee to look at.  Compare not only the application fees and the discount rate, but also the initial cost of equipment, per-transaction fees (a fee you pay on top of the discount for each transaction you process), monthly minimums, voice verification charges, address verification (if extra) fees, monthly statement fees, and any other costs you will incur. A difference of 10 cents on the transaction fee is equivalent to a one-half a percent on the discount rate if your average sale is $20.

Some companies require you to maintain an account in their bank in order to process cards. Read all such agreements closely to determine under what circumstances the bank can put a hold on your account, and how much of the account it can hold back. Find out how often you can withdraw money from such accounts, and check with your own local bank to find out how long it will take to clear checks drawn on the merchant bank.

Pay close attention to the cost of equipment or software for processing the charges, too. Identical software and comparable hardware varies in price by as much as $600 or more depending on who you use purchase it from. If you will need to process credit cards when you are on the road (say, when you fix a customer’s washing machine, or sell your crafts at a crafts fair), find out if the credit card processing company has a mobile option that works with your smart phone.

If at all possible do not lease equipment or software. Buy it at the start. By leasing it you often set yourself up for three or four years of noncancellable lease payments and wind up paying thousands of dollars more than necessary.

Be sure to read ALL applications forms and contracts mailed to you carefully. Read all of the small print. Several companies will charge you if you want to stop processing charges through them in less than two to three years. That cancellation fee is separate from any noncancellable lease clauses for equipment. If you are planning to sell via mail order, look for information on the application form and contract about the percent of transactions you can process as phone orders (non-swiped). What the salesman says on the phone may NOT be what the application actually says. If there’s a dispute, what will stand up is what is on the printed contract you get, not what you say the salesman told you.

Check to see under what conditions the company can terminate your account, and, whether there are monthly minimums or maximums.

The Application Process: What to Expect
Some companies will want the right to send a representative to your place of business (including your home if that’s where you do business) to take a photo of your office. This is to verify that you are at the location you say you are. Some will accept a photo of your office instead of the onsite visit.

Depending on which company you are dealing with, you may have to provide any or all of the following: copy of your business license or certificate of doing business (dba); profit and loss statements; copies of previous years’ tax returns; photo of your office.

All will require two-way access to your bank account if you are accepted. This allows them to deposit funds into your account and also allows them to withdraw them if there are charge backs