According to the SBA, 65 percent of small businesses regularly use credit cards. Despite credit card debt having a bad reputation, using a card for funds isn’t always a bad thing if you keep an eye on your card balance and use credit responsibly. To build, manage and understand your personal credit scores, follow these suggestions on the SmartBiz Small Business Blog: Build and Manage Your Personal Credit Scores.
If you’re considering using a credit card to fund business expenses, review our list of pros and cons to help you make the right decision for your situation.
Pros of Credit Cards
- Purchasing power worldwide – In general, most credit cards can be used everywhere and for many purposes. Credit cards can be used for business building initiatives like buying equipment or beefing up inventory. Most credit cards have a spending limit, so you’ll need to keep that in mind.
- Rewards – Credit card incentives come in many forms that can help you recoup some of your investment. Rewards can be points, cash back, airline miles, etc. The key is to determine exactly what you’re spending money on and choose a card that can maximize your rewards.
- Pay later – The way credit cards work is no mystery. You don’t lay out cash to make purchases. Once you use your card, you’ll owe that amount plus interest with payment generally due about 21 – 25 days after your billing cycle ends. An excellent strategy to stay on top of your bills and help improve your credit profile is to make payments early and in full.
- Building credit – When used responsibly, credit cards can help build your credit profile, important for a number of business building reasons. When you need low-cost funds, the better your credit, the better your interest rate, and the more money you’ll save over time with a low-cost loan. For example, to qualify for an SBA loan with low-rates, long-terms and very low payments, business owners must have personal credit scores above 650 (among other requirements). The SmartBiz Small Business Blog has a wealth of information about credit scores. Review this article to learn how to use credit responsibly. 5 Smart Credit Strategies for Small Business Owners
Cons of Credit Cards
- Reduces your future income – A wise person once said, “Procrastination is like a credit card: it's a lot of fun until you get the bill.” Your future cash flow will be impacted when it’s time to pay. Learn more about managing cash flow here: Cash Flow Management Basics & Tips
- High interest rates – If you need working capital, your best bet is a low-cost loan with low rates, long terms and very low payments. This chart from valuepenguin.com tracks June 2018 credit card rates. As you can see, these funds cost much more than other options.
|Travel Rewards Cards||15.62%||19.24%||15.99%|
|Business Credit Cards||13.12%||19.87%||15.37%|
|Cash Back Credit Cards||13.24%||22.99%||20.90%|
- Late fees – If you pay a credit card bill just one day after the due date, you could be charged a late fee as much as 25 or 35 dollars. Additional late fees pile on if you continue to miss your due date. Additionally, your interest rates may rise.
- Spending limits – Your card company may charge you a penalty for going over your credit limit. This charge is in addition to the interest you pay on the balance you owe. Keep a low credit balance to reduce the amount of interest you’ll pay. Overspending might impact your credit score.
- Credit implications – The SmartBiz Small Business Blog has a wealth of information about credit scores, how they are built and how to manage them. To learn about how credit cards impact your personal and business credit scores, review these in-depth articles:
Your FICO Liquid Credit Score
What is Your Personal Credit Score and Why is it Important?
- Credit card safety – Did you know that 15-30% of all commercial credit losses are due to fraudulent activity? Credit cards can be compromised, causing a huge headache and potentially affecting your credit score. To learn more about fraud protection, what to look out for and strategies to avoid fraud, review this post on the SmartBiz Small Business Blog: 4 Ways Businesses Can Avoid Credit Card Fraud
If you find yourself struggling to make payments or put a dent in expensive credit card totals, debt consolidation might be the right option. If you’ve kept your credit scores healthy, look into low-cost funds like an SBA loan to pay off or consolidate high-interest debt. Learn more about SBA loans on the SmartBiz Loans® website: SBA Loans for Debt Refinance
Your Best Bet
If you need funds to sustain your business or spark growth, your best bet is a low-cost loan. SBA loans have low-rates, long-terms and very low monthly payments. Learn exactly what SBA loans are, how proceeds can be used, qualifications, rates fees and more on the SmartBiz Loans website: The Gold Standard in Small Business Lending. To find out if you qualify for a low-cost SBA loan before you apply, sign up for SmartBiz Advisor, a new and transparent online tool to help you learn how to get the low cost SBA and bank funding you deserve.