Friday, July 23, 2010

Credit or Debit? How to Run a Business via Plastic


Over the last 15 years I've been asked a lot of questions about money. But there are some that I get asked again, and again, and again...I'm thrilled to have a blog so that I can post answers and then just refer folks to the particular article that they need. However, with the economy bouncing around and folks feeling the pennies being pinched I'm getting asked the old questions in new ways and have to reword older posts so that things stay current.

Last week I received a new twist on and old problem. This email from a student in Virginia hit my box a few days ago (I've changed the names of the people involved that is all.)

Dear Janine:

We have a new question: A year or so ago Wilson agreed to cut up all of our credit cards, including business credit cards (inspired by Dave Ramsey who insists that a business can be run without debt or credit cards). Do you agree with Dave Ramsey about that?

The reason I ask is because Wilson flew out to Utah on business this week and ran into his first big disadvantage of not having a credit card -- he was almost unable to rent a car, and the one place that would rent to him on a debit card charges nearly twice as much as the other places he has been using. What are your thoughts about running a business without credit cards? Do the benefits outweigh even these disadvantages?

Thanks for your time, and have a great day!
Alice

Let's address the theory first before we launch into the practice. First off, I really like Dave Ramsey. I've read two of his books, "Financial Peace" and "More than Enough." I have found that our philosophies are very similar and we only have a few points where we differ and those points are minor.

Do I agree with Dave Ramsey about running a business without credit cards?

Yes and No. How's that for walking the fence? Let me explain. I agree with Mr. Ramsey that we need to be allergic to debt. He and I have both been caught in the debt trap and we have both vowed never to walk that path again. However, I have trained myself not to use my credit cards unless I have cash IN THE BANK to pay off the statement at the end of each month. I DO NOT allow myself to have roll-over debt. This is a horrid use of my hard won earnings and I won't allow myself to pay that much interest to borrow money.

However, I do understand what Mr. Ramsey is saying. Please remember he has clients that are so far in debt it takes them anywhere from 7-14 years to pay it all off. The best way to help these people is to remove all temptation of going further into debt by refusing them any access to short term loans. Debt is a disease. There are folks out there (Lord knows I've worked with them and so has Dave!) That are addicted, that's right, addicted to debt. For these people you have to cut up all their cards. They can't keep their hands off of them and use them at every opportunity. So I understand why Dave would say this.

My personal philosophy is this: use credit cards for your business to hold rental cars, hotels and airline reservations and other business related activities, but pay off the balance with travelers checks or your debit card or cash. You get the idea right? Most of these agencies do not "charge" your card until you return the car or check out of the hotel, etc. So use the credit card "hold" your spot, but pay for it using other means (your debit card, etc.)

The challenge is this...can you have that card in your wallet and not be "tempted" to put a purchase on it "just this once" even though you don't have the money to pay for it. Frequently, business owners are overly optimistic on this month's sales to cover their expenses. Face it, they have to be optimistic otherwise you wouldn't be in business for yourself, right? But don't allow your optimism to run your business in debt.

Many a client of mine has done just that. We would work together for 6 months to 3 years getting them out of debt and then they would decide to go into business for themselves and in a matter of 6 months be further in the hole then they were when we first started because they ran their business on a debt basis rather then using the financial principles they had learned over the past 3 years! It was maddening for me. Especially when I found out a client of mine had to declare bancruptcy after working with them for 4 years because they had $80,000 in business debt ALL on PERSONAL credit cards and they had neglected to tell me THAT part of their financial situation.

So you can see why Mr. Ramsey might be just a wee bit DRASTIC in his methods to keep his students/clients out of debt. He wants you to be seriously allergic to all things loan-ish for very good reason.

My advice: Run your business debt free, if you don't have the cash, don't make that jump (using a loan) to the next phase of your business or take that trip. Use the credit cards of the business as "place holders" for cars, hotels and the like unless you have money in the bank that can pay off the card when the statement arrives. You are to absolutely NOT allow roll-over debt!!! Okay...I'll get off my soap box now.

Have an abundant day!

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