The Pros And Cons of Using Business Credit Cards

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How do you pay for operating expenses, when your business is just getting started? What do you do when it’s time to grow, or you need to purchase more supplies quickly? Many entrepreneurs turn to their business credit cards to get the funding they need. Others are staunchly against this practice. So, is this a wise decision or not? Let’s dig in!

The answer to that depends on your specific circumstances. There are times when a credit card can be the ideal tool for keeping your business going. There are also cases when using your credit card might cause more harm than good. The key to knowing what is best for your business is understanding the benefits and drawbacks of using a business credit card.

How do Business Credit Cards Work?

Business owners use small business credit cards to gain access to a revolving line of credit. That credit line comes with a set limit, and they use that credit to make purchases or obtain cash. It works similarly to a consumer credit card in that there is an interest charge for any balance not paid in full during each billing cycle. Business owners obtain credit cards through their bank or credit card providers. The application process is simple, and can usually be done online.

Best Business Credit Cards – What to Look For?

If you decide to get a credit card for your business, don’t accept the first offer you receive. Instead, shop around until you find a card that has the best perks possible. These include:

  • Reward Multipliers: These increase the number of rewards points you receive when you make purchases in specific categories.
  • Cell Phone Insurance: This may not be the first thing you consider, but it is a useful perk to have, especially if you have invested in an expensive mobile device for your business.
  • Airline Miles and Travel Fee Bonuses: If you travel frequently, look for a card that pays you back for your travel-related expenses.
  • No Annual Fees: Look for a card with no annual fees, or haggle with the CC company to get them waived.
  • A Bonus For Enrolling: Many business cards offer a bonus for signing up. These points are often made available once you spend a certain amount of money within a specified period.
  • Access to Business Tools: Some credit card providers have partnered with other businesses to give their customers free or discounted access to business tools and resources. Some credit card companies offer free financial planners and education through their websites.
  • Car Rental Insurance: If you use your credit card to rent a vehicle for business purposes, you may get a discount on your liability insurance.
  • VIP Travel Perks: If you become an established card user, you may be able to access perks when traveling. This includes access to VIP lounges at the airport and priority boarding.

Of course, while all of these features are wonderful to have, don’t let the promise of ‘extras’ tempt you so much that you don’t consider the basics. You want a credit card with a competitive interest rate from a reputable company with good customer service. You’ll also want to be sure to read any disclosures.

Should You Use a Credit Card to Finance Your Small Business?

It’s not as easy as it once was to obtain bank funding for a small business. As a result, many small business owners find themselves bootstrapping their own companies by using credit cards. In fact, it’s not unusual for entrepreneurs to use their personal credit cards to get the cash or credit they need to stay above water. That’s a bit risky, as it leaves the business owner personally liable for that debt.

Unfortunately, it can seem as if there’s no real choice. After all, how do you grow your business with no credit? If you can’t get a loan from the bank, and you haven’t established your creditworthiness as a business owner, personal credit can seem like the only answer.

If you do use a personal credit card to finance your small business, your goals should be to limit your personal debt, establish your credit as a business owner, and seek other funding options. This includes:

  • Seek out government-backed loans from the SBA or other programs.
  • Access micro-lending programs to purchase supplies or cover short term expenses.
  • Use P2P lending platforms.
  • Seek investment funds from friends and family members.
  • Consider starting a crowdfunding campaign.
  • Reduce costs by saving on office space rent and working from home or a coworking space.
  • Paying debts on time.
  • Incorporating your business to establish it as its own financial entity.

If you can obtain a business credit card, there are things that you can do to get the most out of the opportunity to fund your business.

Negotiate For a Lower Interest Rate

Once you establish yourself as being creditworthy by paying your bill on time, you should contact the credit card company about a more favorable rate. By minimizing your interest payments, you can focus on paying more of the principal of your balance each month. When you first obtain a business credit card, look for a card that has a fixed rate. That ensures you won’t be vulnerable to interest fluctuations.

Pay as Much of Your Balance as You Can Each Billing Cycle

It’s simple math. Pay more of your balance each month, and you will pay down your debt sooner.

Be Aware of Hidden Fees

Before you choose a business credit card, be certain that you understand any fees that may be applied to your account. Some of the more common include:

  • Balance Transfer Fees
  • Foreign Transaction Fees
  • Inactivity Fees
  • Cash Advance Fees
  • Account Closing Fees
  • Late Fees

Be particularly aware of that last one. While most people expect to be penalized for late payment, many don’t realize that they may be subject to skyrocketing interest rates simply for making one late payment.

Be Selective About Allowing Employees Access

Most business owners want to trust their employees, and in most instances, they can. Still, there is some risk in allowing your employees access to the company credit card. Give access on as-needed basis money, and ask employees to submit receipts so that you aren’t surprised by any charges.

Watch Your Credit Card Statements

Pay close attention to your credit card statements, and keep your records of what you spend on your business cards. You must stay on top of things to catch any billing mistakes or incidents of fraud.

The Pros & Cons

Should you get a credit card to help you ensure that your business thrives financially? There are certainly good reasons to do this. There are also some drawbacks. Here’s a list of the pros & Cons.

Pros

  • Revolving Credit is Convenient: You only have to apply for a credit card once. After you’ve obtained it, you can use that credit over and over as long as you pay the balance.
  • Better Interest Rates: If you shop around, you can find business credit cards with exceptionally competitive interest rates. Sometimes, these rates are lower than standard interest rates for business loans.
  • You Don’t Need Collateral: This is unsecured credit, something that many startups need.
  • Establish Better Credit: Use your card responsibly, and pay the bill on time. Your business will become more creditworthy over time.
  • Simplicity: The application process is easy, and doesn’t require in-person visits or references.
  • Retain Equity: Investors expect equity. Credit card companies do not.
  • Easier Financial Tracking: If you fund your business with a credit card, you have a single place to track your financials in that area.
  • Emergency Funds: A credit card can be used to pay expenses should you encounter an emergency.
  • Easier Disputes: If you have reason to dispute a charge, the process is much easier if you have used a credit card to make a purchase.

Cons

  • Liability: You are personally liable for credit card debt for your business in almost all cases.
  • Low Credit Limits: As a general rule, you will receive access to less money than you would with a business loan or capital from a VC investor.
  • Bad Debt: The debt you incur with your business credit card can impact your personal credit score. It will also be counted towards your overall debt should you apply for personal credit of any type.
  • Expense: If you are unable to pay down your credit card debt before those attractive introductory rates expire, you could be stuck paying high-interest rates. This can mean paying back more over time than you would with a competitive business loan.

Now that you know the benefits and drawbacks you can make an informed decision as to whether or not you should obtain a credit card for your business. Even better, you now have the information you need to use your credit card wisely should you choose to obtain one, and you know what perks can make a credit card worthwhile. Finally, if you don’t want to use a credit card for business funding, there are some viable alternatives for you to consider.

Photo by Ryan Born.

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