The Cash Flow Blog

When under cash flow stress, there is great temptation to pull out your wallet and fix your cash problem with a credit card.  Many business leaders have done it.  And many, if not not most, have lived to regret it.

I’m not talking about using credit cards to pay routine business expenses, we all do that – web hosting, travel, etc.  I’m speaking about using credit cards in volume to pay expenses such as payroll and rent when you’re facing a serious shortage of cash in your business.  In cases such as this, you should seek short-term lending from your bank, investors, and other lending sources or you should take aggressive measures to quickly lower expenses.

The problem with using credit cards to address cash flow problems is it’s digging a bigger hole to bury yourself in later.  Credit card debit comes with outrageous interest rates and can be as addicting as crack.

Credit cards look good in a cash flow crisis for several reasons:

• easy to use
• immediate access to money
• low monthly payments
• puts the immediate problem behind you

But here are the realities:

• high interest rate
• doesn’t fix the problem, just pushes it to the next month
• makes your cash flow problem worse as next month you have the original expense and need to service the credit card debt
• gives a false sense of relief and can stifle action to fix the underlying cash flow problem

Two quick stories.

I know someone who periodically floats rent and sometimes payroll with credit cards – giving himself a temporary loan while awaiting receipt of customer payments.  It works for him and he hasn’t been bit yet.

I also know a person who had a serious cash flow problem in their business and used credit cards to manage their way through it – $100K in credit card debt later they called it quits.  Years later they are still working to settle their debt.  When asked how it happened, this business leader answered “It was easy to get the money and we thought we could get ourselves out of the mess in a few months.”

Think twice before you rack up credit card debt to pay business expenses.

Related, if you’re interested in FICO scoring – how it’s established and its importance to accessing credit of all type – here is a nice article that breaks it down nicely and easily explains the importance to all borrowers.

Lenders are tightening their standards for new loans and credit cards, and they’re paying close attention to an applicant’s credit score. That score, called a FICO score, often determines whether you’ll get credit and at what interest rate. ~via npr.org

Part of the story is how your use of credit cards and other available credit can lower your FICO score, thereby increasing your cost of moeny while deceasing your access to funding – a double-edged sword.

If you're new here, please subscribe to this site. It's the best way to make sure you don't miss any new tips or ideas to maximize your business.

Thanks for visiting!