Question

Credit card usage in the United States is substantial. Many startup companies use credit cards as a way to help meet short-term financial needs. The most common forms of debt for startups are use of credit cards and loans from relatives.

Suppose that you start up Brothers Sandwich Shop. You invested your savings of $20,000 and borrowed $70,000 from your relatives. Although sales in the first few months are good, you see that you may not have sufficient cash to pay expenses and maintain your inventory at acceptable levels, at least in the short term. You decide you may need to use one or more credit cards to fund the possible cash shortfall.

Instructions:

(a) Go to the Internet and find two sources that provide insight into how to compare credit card terms.

(b) Develop a list, in descending order of importance, as to what features are most important to you in selecting a credit card for your business.

(c) Examine the features of your present credit card. (If you do not have a credit card, select a likely one online for this exercise.) Given your analysis above, what are the three major disadvantages of your present credit card?

Answer 1

Answer:

1. On Internet, two major websites providing insights in comparing credit card are creditcards.com and nerdwallet.com. On these two websites, various varities of credit card are offered. These credit card differs in term of incentives offered, Annual percentage rate and also with respect to annual fees charged by them. Also there are various categories in credit cards such as travel, study, business,etc. Being a startup, business credit card will be the most obvious and optimal choice.

2. For selecting credit card, the following parameters are important:

a) Annual Percentage rate: This is the annual rate being charged by the credit card providers. Being a startup, it would make sense to go for a credit card provider that charges the minimum APR. This will help the business to saves on a majority of cost. A difference of even 0.5% to 1% in APR can create a huge margin for business.

b) Annual fees: Every credit card provider charges different fees for their services. More the number of services, more will be the annual fees. As the focus is just on meeting financial needs, the business should focus on getting only the basic services and hence the credit card provider charging lowest annal fees should be selected.

c) Integration of Credit card with Vendors: A credit card which is integrated with various vendors will help in simplifying the process of business purchase. For example, a credit card many have integartion with airlines, gas stations, etc. for helping out small business and also reward points are given for making business purchase through credit card.

d) Incentives available: A credit card provider providing maximum reward points, bonus points and other incentives should be selected to derived the maximum benefit at the given cost.

3) The three main disadvantages of present credit card are:

a) The APR is significantly higher than many other credit card providers in the market. The difference in APR of present credit card with other credit ard is around 1% which increases the costs of doing business.

b) There a number of additional services which are not availed as of now. These additional services adds to the cost burden.

c) Due to additional services availed, annual fees, charged by the credit card provider is around $450 while in case of basic card, first year annual fees is waived off and then $175 is charged on annual basis. Hence. there are increasing overheads as result of increased annual fees.

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