More than one-third—36%—of small businesses tapped into credit card financing last year, says the National Small Business Association’s 2014 year-end report. If you’re considering joining their ranks, be sure you understand the pros and cons of credit card financing first.
Using Credit Card Financing to Build a New Business
Pro: If you are just starting your business and have either been turned down for a business loan or don’t yet have a track record of profitability, then a credit card can be an easy way to finance your business without putting up any collateral or doing a lot of paperwork.
Con: To obtain the business credit cards with the best terms, you need a good personal credit rating. If a poor credit rating has kept you from getting a business loan, it may also keep you from getting a business credit card with good terms.
Using Credit Card Financing to Build Business Credit History
Pro: If you make your credit card payments on time by using a credit card that reports your payment history to business credit agencies like Experian and Dun & Bradstreet, then you’ll be building a good credit history for your business. This will make it easier to get other forms of financing down the road.
Con: Interest rates for business credit cards can skyrocket if you make a late payment or miss a payment. In fact, because business credit cards lack the protections provided for consumer credit cards, the credit card company can change the terms at any time.
Using Credit Card Financing to Get Business Card-Related Perks
Pro: Depending on the business credit card you use, you may be able to enjoy other benefits, such as earning rewards points for purchases, business travel or entertainment expenses.
Con: Some business credit cards charge high annual fees in return for those benefits. Be sure to evaluate any fees before getting or using a business credit card.
Using Credit Card Financing to Take Advantage of Low Interest Rates
Pro: Although the interest rates are higher than for traditional business loans, business credit cards often charge lower interest rates than other types of alternative financing.
Con: To avoid interest charges, you need to pay off your business credit cards in full each month, which can be difficult to do. Without careful management, interest payments can spiral upward—especially if you take out a cash advance.
Using Credit Card Financing to Expand Your Available Credit
Pro: With a business credit card, you have the flexibility to use only the amount of credit you need each month. With a business loan, you obtain a lump sum and then start paying it back right away.
Con: If you charge too much on a business credit card and thus increase your credit utilization ratio, it can hurt your credit score. Try to limit your use of credit to 30% of your available credit line. Keep in mind, however, that adhering to that limit will also affect the amount of credit you have available on each card, which may require you to obtain several cards to get the credit you need.
Using Credit Card Financing for Lower Loan Amounts
Pro: Business loans for smaller amounts are often difficult to get from traditional financing sources. If you need ,000 or less, credit card financing can be the simplest way to get it.
Con: Credit card financing won’t provide enough capital for major expenses, such as buying a commercial building.
Using Credit Card Financing to Take Advantage of 0% APR
Pro: If you are confident you can pay off your balance in full each month, you can take advantage of credit cards offering 0% APR.
Con: Business credit cards are less likely than personal credit cards to offer 0% APR. If they do, it’s usually for a very limited time. You’ll need to carefully manage cash flow to pay off the balance before the low rate expires.
Using Credit Card Financing for Routine Business Use
Pro: Making purchases on a business credit card makes tax time a breeze, since most cards will automatically categorize your expenses.
Con: If you use a personal credit card for business financing, you’re commingling business and personal credit—a big mistake. This prevents you from writing off the cost of credit card financing on your business taxes, could damage your personal credit rating and means you aren’t building a business credit history—making it even harder to get financing in the future.
To learn more about financing options for your small business, check out the next article on three loan-based methods to get the money you need.
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