Credit card debt has been a serious problem for the consumer in recent years with the downturn of the economy.
However, it can be just as problematic for the small business consumer who relies on credit card purchases and payments to get through slow times in the industry.
Managing credit card debt is just as important for the man or woman running a small company as for the individual.
Why Credit Card Debt Matters
Just like with individual consumers, lenders look at the overall financial health of a business when it applies for a loan. A company that appears overextended is a higher credit risk and is likely to be turned down for a loan or pay higher interest rates.
Credit cards and lines of credit can be important for a small business that has peak and slow seasons. However, it can also be a red flag for lenders if the amount of outstanding debt is too high.
On the other hand; a business that never uses credit is more difficult to assess for how it would handle new credit.
Having the right amount of debt is a tricky situation.
As the article, “Lower Credit Card Debt Could Limit Distressed Debt Sales” states, consumers are using credit more now because of increased confidence in the economy.
This same attitude is seen in businesses.
A small business is more willing to expand when the economy is favorable to the industry. It may take on more debt in the form of loans or credit due to the favorable outlook.
For the small business that is hoping to expand, managing debt is crucial to receiving the new funds in the form of a loan. The lender must see that the current debt is an asset rather than crippling the business and indicating certain failure.
Debt is just part of the financial picture that businesses must show to lenders when looking for credit. They must also demonstrate continued revenue and ongoing stability.
When debt is part of a healthy financial outlook for a business, lenders are not as wary about extending more credit.
Before a small business owner seeks out more credit or a new loan to expand a business or start a second business, he or she must be able to demonstrate a healthy image for the current business.
For the small business that doesn’t have such a healthy picture but has hope of turning it around, the owner may have to look elsewhere for financing.
He or she may want to consider private investors or crowd-funding to obtain the necessary funds to help the business grow.
While private lenders and investors are often more lenient, they still expect to know their funds are safe.
A business owner must convince them that the company is sound and using solid financial practices for the long-term success.
Managing debt and using credit wisely is not just good practice for the individual; it is sound business practice for any small business owner.
About the Author: Joyce Morse is an author who writes on a variety of topics, including finance and running a small business.