Every business needs cash. This resource covers salaries, equipment purchases, mortgage payments, and other expenses. Some businesses generate enough operating income to cover the difference, but high-ticket expenses and mounting short-term costs can challenge your cash flow. As a result, business owners seek financing to cover expenses when the company’s cash flow isn’t enough.
Business credit cards present a solution for companies that need financing. We will discuss the viability of using business credit cards to fund companies and what to know before applying for a card.
Can You Fund a Business with Credit Cards?
Most businesses will have no problem funding themselves with business credit cards, but it depends on how much capital they need. Not every business owner gets a $250,000 credit limit. You may end up with a $50,000 line of credit instead. Some business owners only need a $50,000 credit line to finance incoming expenses, while others will need more capital.
Advantages of Funding a Business with Credit Cards
Wondering if a business credit card makes sense for you? These cards have several key advantages over other financing options.
Retain Equity
Business owners do not have to sacrifice equity to obtain business credit cards. Some business owners will obtain financing by giving equity to investors. This strategy provides immediate financial relief, but you will receive less upside when your company grows. On the other hand, if you give up enough equity, your shareholders can make business decisions for your company if they have a controlling stake. Business credit cards provide the financing you need without those headaches.
No Collateral Needed
Every business owner strives to pay off their debt, but things change. Your business can slow down, and it can become challenging to keep up with debt repayment. Falling behind on a business credit card will increase your balance because of interest. It’s worse if you take out a loan because the lender can seize collateral. Some business owners use equipment financing to obtain capital. Losing valuable equipment can further derail your company and hurt cash flow. While falling behind on credit card debt is not ideal, you don’t have to worry about collateral.
Revolving Credit
If you take out a loan and repay it, you will have to apply for another loan to get additional financing. Revolving credit is available anytime you need it. You won’t incur interest on an unused credit limit, and you won’t have to reapply for business credit after repaying your balance.
Low- or No-interest Rate Deals
Some business credit cards offer low and no-interest rate deals. Interest rates significantly impact your monthly payments and how quickly you get out of debt. So shaving off a few percentage points can make a big difference in your profits.
Introductory 0% APR Periods
Many credit card issuers offer introductory 0% APR periods for new cardholders. Having 0% APR for the first 6-18 months gives you additional time to repay your credit card balance before interest accrues on your business credit card.
No Balance Transfer Fees
Some business owners take out new credit cards to transfer their balance from an older card. This transfer does not result in additional fees and is eligible for the introductory 0% APR period. In addition, you can open a new business credit card to transfer your existing balance and give yourself a break from interest payments.
Signup Bonuses & Card Rewards
Many business credit cards have signup bonuses and card rewards that allow you to earn back some of the money you spend. For example, some business credit cards will give you hundreds of dollars if you spend a few thousand dollars within the first 90 days of opening the card. Companies also give you points or cashback on every purchase. Some cards have universal points and cashback for every purchase, while others provide additional rewards for specific expense categories.
Disadvantages of Funding a Business with Credit Cards
Business credit cards give business owners more choices, but they aren’t perfect. Keep these cons in mind when considering business credit cards as your funding source.
Lower Credit Limits
You can probably get more capital if you apply for a loan. Business credit cards provide enough funds to cover most of your short-term expenses. However, other financial products may make more sense if you need an expensive piece of equipment or want to close in on a commercial property.
Risk of Misuse and Abuse
Credit cards ease financial stresses at the moment, but they can cause financial struggles in the future. Overusing your card without a plan to repay the debt can lead to trouble and put your finances at risk. Business credit cards require self-control to repay debt and avoid long-term financial struggles.
You May be Personally Liable
Business credit cards rarely get you out of personal liability. Most credit card providers have you agree to repay the business credit card’s debt if the business cannot make payments. This arrangement is similar to what you can expect from a small business loan. You should be careful with who can use your business credit card if you provide access to anyone other than yourself.
Risk of Credit Damage
Credit cards work well when cardholders make on-time payments. However, some cardholders miss payments or don’t have enough funds to make the minimum payment. Making late payments can negatively impact your credit score and hurt your chances of obtaining financing in the future. Even if you get capital, a lower credit score will translate into higher interest rates and a lower loan amount.
Other Things to Consider When Funding a Business with Credit Cards
We have discussed the advantages and disadvantages of using credit cards to fund your business. Pros and cons provide a solid foundation, but you should consider these additional details when using a business credit card as your funding source.
Choose a Credit Card That’s Right for You
Credit card issuers have several perks designed to attract more clients. You should review each card’s rewards system, credit limit, interest rate, and other details.
Be Aware of Credit Card Fees
Credit card companies make a lot of money from their fees. These fees range from late fees to annual fees, and you have to stay on top of them. Reviewing a credit card’s fees before applying will reduce unpleasant billing surprises in the future.
Negotiate with the Provider for Better Terms
Credit card companies understand that you can easily work with a competitor. Some issuers will make adjustments if you ask for better terms. Credit card companies may offer a reduced interest rate or higher credit limit if it’s the difference between you choosing them or working with another provider. While credit card companies are not obligated to fulfill your requests, it doesn’t hurt to ask.
Set Credit Card Limits
Your credit card’s limit determines how much you can borrow. A higher limit lets you access more capital and can help your credit score. The higher credit limit will strengthen your credit utilization ratio, a category that makes up 30% of your credit score.
Monitor Your Credit Card Transactions
Staying on top of your credit card activity will let you avoid the most common pitfalls. Letting a credit card balance grow makes it more challenging to claw your way out of debt. Credit cards provide valuable short-term financing, but you don’t want to get stuck with a high balance for an extended period of time.
Only Use It for Business-related Expenses
While you can legally use a business credit card for personal expenses, the action would likely violate the terms of your agreement. Credit card providers offer more favorable rewards on business cards and don’t want them getting used for personal expenses. Using a business credit card for personal expenses can hurt your ability to get credit in the future, possibly get your card closed, and create significant accounting headaches.
Pay Off Your Balance Promptly
Credit cards strengthen your financial flexibility, but that same strength can snowball into a pile of debt. Making on-time payments will chip away at the principal and improve your business credit score. This score can help you qualify for better financing in the future. Scoring a lower interest rate on a business loan in the future can save you thousands of dollars in the long run.
