ONE of the biggest challenges for any small business is getting the investments and funds needed to grow. Although a small business loan or overdraft is often the first thought, they are not always easily obtainable. Business credit cards can be a suitable alternative, and can actually benefit a small business in a few ways a loan cannot. It may take a little more diligence from your end, but if handled correctly business credit cards are an excellent way to get fast access to capital.
Benefits Of A Business Credit Card
It Is Easier To Obtain
For many small businesses, guaranteeing a line of credit – especially if you are lacking a well-established credit history – can be a struggle. A credit card may be the easiest type of credit to get. It doesn’t necessarily have the benefits of other types of credit, but it might be enough.
Cash Flow Management
Managing the ebbs and flows of your cash flow as a small business is a bit like rowing a canoe down a river. You have to be able to withstand the choppier water by steering towards calmer waters. Similarly, managing your cash flow in a business is all about slowing down cash payments while encouraging any money owed to make its way to you. Better still, the ability to separate and monitor your personal expenses from your business ones makes tracking your expenditure a breeze. Not only does this ease tax woes, but having a monthly statement tidies up and streamlines cash flow management.
It Can Help Your Credit Rating
Using a business credit card in your small business can benefit you a great deal – provided it is used responsibly. If you are prompt with payments as well as above the minimum payments, your credit rating can grow. Particularly if your company has never attempted to source credit before, a credit card can help start building your credit rating. This can be pivotal for your small business obtaining a business loan or line of credit down the road.
The companies that provide business credit cards are very eager for your patronage, and often use sign-up bonuses and incentives to draw you in. It is not uncommon for cards to offer things such as 3-5 % rewards on specific business expenditures. These little incentives can add up to make a big difference in your finances. Other companies are known to offer airline miles and discounts on other products and services.
Being able to pull out a credit card for your business expenses is a true convenience. It may be small, but when compared to a money order or a checkbook, business credit cards are a masterstroke.
Disadvantages Of A Business Credit Card
You Pay More For Less
One of the biggest drawbacks of a business credit card is the higher interest rates that you will expect to pay. On average, you pay a 1-3 % higher interest rate when compared to the prime rates found in lines of credit and bank loans. It is incredibly common for a business to carry a balance on their cards, so that interest rate can really hit hard if you are not careful. Another problem is that, as it is so convenient, the amount of money that you can obtain is smaller than the other avenues.
As standard, business credit cards require a personal-liability agreement to be in place. This is a security measure to ensure that all debts are repaid, one way or another. This could leave your business wide open to issues such as a negative impact on your personal credit report, ultimately hurting your ability to borrow money for yourself.
Although the convenience of a business credit card is a massive plus, it also comes with drawbacks. Your card information could be compromised. It is important to stay on top of employees expenditure using the card. It should only be used to business-related expenses, and nothing else. But these concerns are the same as those with a debit card, so if you’re already using your business debit card to source goods or pay for things there’s no real difference from a security perspective.
Unstable Interest Rates
The flexibility of interest rates on a business credit card is something that you would not deal with if you had a loan or fixed line of credit. Unfortunately, card issuers look at how you manage your account and can change your rates accordingly. This can be quite detrimental to your finances, if left unchecked.
So, Is It For You?
Business credit cards can be a great way of obtaining some capital quickly, conveniently and to the benefit of your company. When used correctly, your credit rating – and ultimately the amount of capital you can get – can grow positively. However, for all of the convenience that it allows, if you are not careful with your carried balances you can end up out of pocket quickly. The increased, fluctuating interest rates and personal liability that you are accountable for are risks, however if you have few options a business credit card can help enormously.
Mark is a director at Horner Downey & Co., UK-based chartered accountants established forty years providing sound advice and value for money services to a wide range of clients.