Currently, credit cards have a negative reputation. They are associated with debt, shopping addictions, failed financial plans, and other problems. This association causes many small business owners to eschew credit card use, but credit cards can help your business if used correctly. If you are leery of credit card use for your business, educate yourself about the pros and cons. Credit cards may be the piece your business’ puzzle is missing, the one that will increase its success.
What is a Small Business Credit Card?
Unlike consumer cards, a small business credit card is meant only for business-related purchases. It provides you, the business owner, with a revolving line of credit, which can increase your security when making large purchases. Like a consumer card, though, a small business credit card has a credit limit and an interest charge for unpaid bills. These similarities discourage debt, especially for business owners with large employee teams depending on them.
Why Use a Small Business Credit Card?
Many business owners choose credit cards over traditional credit lines because they are more flexible than loans with fixed interest rates. With a small business credit card, you can pay off as much as you need or want to each month. If you have extra cash or anticipate an upswing in your market, you can charge up to your credit limit and repay large purchases in small installments. Without a fixed credit line or interest rate, you also don’t have to apply for a new loan once you’ve used up or repaid your credit limit.
Small business credit cards are often more convenient than traditional loans. If you have a good credit history, you can be approved for a small business credit card in days, as opposed to the weeks it might take to do the paperwork for a business loan. Even if you have less than perfect credit, you may still qualify for some credit cards. Paying them off on time or early may actually increase your credit score. In addition, credit card usage means you always have quick access to cash. If you have to make a purchase or pay off an investor quickly, you can do so in a matter of minutes or even seconds. You won’t have to rebalance your checkbook every time you withdraw cash.
As a business owner, you may get more financial assistance from credit card companies than banks and other traditional lenders. Companies often provide features like year-end account summaries and other online record-keeping tools. This streamlines financial processes like categorizing and managing expenses, paying taxes, and testing ways to increase revenue. Additionally, such tools can improve your business’ reputation. If customers see you are financially savvy and familiar with financial technology, they’ll trust you more easily with their money.
Most business owners think credit cards will increase financial problems when the market dives or there are no receivables. In reality, a credit card can give you a “cushion” during lean times. Many business owners only use their small business cards in emergencies, such as to pay for new equipment after external damage, or improve computer protection if their websites or software are hacked. When you get a small business card, consider budgeting how much will go toward important or incidental purchases, and how much you want to save “for a rainy day.”
When Not to Use a Small Business Credit Card
Despite their advantages, small business credit cards may be a bad idea in some situations. If your business is new, or if you have revamped it to sell new products and services, don’t invest in a card right away. Small business credit cards are typically more expensive than fixed credit; their interest rates can be 1-3% over prime. Additionally, small business credit cards are not as regulated as traditional loans. Although credit limits and interest rates can keep you out of credit card debt, it’s easy to overextend yourself. This often happens when new businesses make several purchases at once, or try to implement several new ideas.
Small business credit cards are often not as secure as traditional loans or fixed credit. It’s easy to get into disputes with credit card companies over billing or returning merchandise, because they don’t guarantee the same services as consumer card companies. Your credit card is also more vulnerable to data breaches because many more people handle business credit cards than consumer ones. Do not obtain a small business credit card without intense scrutiny and company security.
