The Benefits of Credit Card Financing For Small Business
It’s becoming increasingly harder for small businesses to get traditional loans, forcing many entrepreneurs to scramble for solutions. As MotleyFool’s John Maxfield puts it “loans to big businesses offer economies of scale, which offset the individualized attention that's needed to analyze a business' creditworthiness”. Put simply, the cost of underwriting small business loans has become not worth the payoff for many of the nation’s largest financial institutions. A popular alternative for some individuals has been to finance a part of their business using credit cards. This method offers a set of advantages and disadvantages, which require careful consideration.
If you always pay off your monthly bill, you can increase cash flow through rewards. Outside of the added payment flexibility they provide, a major benefit of using credit cards is their rewards programs. Through signup bonuses and rewards earned from spending, using a piece of plastic to pay for your company’s expenses gives extra returns on each purchase. According to some studies, the average small business spends roughly $26,940 annually. If you get a simple 2% cash back card for your company, you could earn over $530 back in rewards. That’s more money to pay for supplies, utility bills, or some unforeseen expenses that arise. If you truly optimize your choice of small business credit card, you could save a significant amount.
Centralizing payments to credit cards can help track spending. By paying all your vendors out of one account, and charging miscellaneous purchases onto a credit card, you will be creating an organized record of your spending. Furthermore, many small business credit cards come with the ability to export your statements into other programs such as QuickBooks or Excel. There, you can categorize your purchases based on date, vendor, or even product/service type. If you don’t have a dedicated accountant working for your company, this can save you a ton of time and effort in trying to keep track of where your funding is going. Best yet, this method can scale with your business. If you hire employees who need to use company funds, you can issue employee cards to them, which will all be tied back to the same account. Though money will be spent without direct supervision, centralizing it with credit cards will allow you to keep an eye on everything.
Some business credit cards offer deferred interest promotions. If your business needs a little bit of flexibility when it comes to paying back loans, some credit cards are tailored to provide just that. Some of the best business credit cards come with 0% introductory APR periods that last a year or more. If your company needs to make large purchases that can’t be immediately paid off, using a card like this is highly recommended. The interest savings you can get out of it can be huge.
Risks of Using Small Business Credit Cards
Revolving lines of credit extended for business purposes don’t come with the same legal protections afforded to consumers. The 2009 CARD Act outlined certain requirements banks must adhere to with consumer credit card accounts, such as limits on interest rates and standardized disclosures. Small business owners, however, still need to make sure to always read the fine print on new account agreements in order to make sure they are not being taken advantage of. While large national banks will usually have policies similar to consumer cards, if you are applying through small regional institutions it’s always a good idea to conduct extra due diligence of the terms.
Issuing employee cards is a double-edged sword. As we pointed out before, having employees use a company credit card for business-related purchases can be a good way to centralize the tracking of expenses. However, at the same time issuing an employee card opens up your business to extra liabilities. Unless you have a person dedicated to tracking spending by all employees, it may be difficult to catch un-authorized purchases quickly enough to stop them. In such instances, you will still be required to fully pay back the debt to the card issuer, as you are accountable for it. Therefore, without proper spend tracking and management, employee credit cards can potentially introduce a headache for some mid-sized or large-sized firms. One recommended solution to this issue is to only issue employee cards to business partners or staff who can handle them responsibly.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.