There’s a huge variety of finance solutions available to small businesses these days, and each have their own pros and cons.
What works for one business may not work for another, and you may use a number of different products to finance your cashflow, short-term projects, or long-term growth plans.
Many companies find business credit cards useful for the short-term end of the spectrum, and while you wouldn’t necessarily use one to pay for larger purchases, they can be a good tool for day-to-day spending, expense tracking, and perhaps emergency cashflow needs.
What is a business credit card?
If you’ve ever had a personal credit card, you’ll have a good idea how a business credit card works, because it’s essentially the same. Rather than being issued to you as an individual, it is issued to your company.
It comes with an agreed credit limit determined by the lender, and you will not be able to spend more than that amount.
When there are funds outstanding on the card, you’ll have a monthly minimum payment that has to be met, but apart from that you can repay what you have borrowed over time at a determined rate of interest.
Businesses often use credit cards as a handy way of tracking company expenses, to bridge short-term cashflow gaps, or to tackle emergency situations requiring a sudden injection of cash.
Business credit card benefits
Business credit cards have a number of features which can be very useful. Some come with an interest-free period of borrowing, which is usually around 45 to 60 days. This is great for avoiding interest when you urgently need cash in the short-term, but will be able to pay it back soon after.
For example, perhaps you need to buy supplies to fulfil an order, and have to wait 30 days before you’re paid by your customer (if this is a common occurrence, however, then invoice finance might be a better long-term solution).
Using a business credit card is also an effective way of keeping track of business expenses. Some lenders will provide several cards for one account, which is great if you want several employees to have their own card. You may even be able to set different limits for different account users.
Many business credit cards also offer cashback and rewards, which can be a nice little bonus in return for your spending.
Once you have a business credit card, it’s there to be called upon whenever you need it, which means if ever you require cash fast, you’ll be able to access it without having to go through any new funding applications – assuming that the amount you need is within your available credit limit.
Downsides to business credit cards
Company credit cards fall under the category of unsecured lending, and as a result they’re not the cheapest form of borrowing. If you can’t repay the balance within the interest-free period (or aren’t planning to), you can expect to pay a high rate of interest in return for the flexibility.
However, don’t dwell too much on the quoted APR figures — because the “Annual Percentage Rate” is just that, and won’t reflect the true cost of borrowing over less than a year. Realistically, most businesses will use a credit card to borrow over a few months or weeks, so an annual calculation isn’t that useful.
With the potential for several employees to be using a corporate credit card account, coupled with these interest rates, you’ll have to keep a close eye on statements.
It’s also worth bearing in mind that not everyone will accept a credit card, and some suppliers may prefer a bank transfer.
As with all forms of finance, there are pros and cons. Business credit cards can be a very useful tool if you’re using them for expense tracking or short-term cashflow gaps of a few weeks.
However, if you need larger amounts of cash than your credit card offers it might be worth exploring some of the alternatives. If you’d like some help finding the right option for your business, Funding Options can match your business with the best lender for your situation.
About the author
This guide has been written exclusively for ByteStart by Conrad Ford, Chief Executive of Funding Options, which was recently described by the Telegraph as “the matchmaking website for small businesses and lenders”.
More help on funding a business
ByteStart is packed with help and tips on all aspects of financing your business. Check out some of our most popular guides;
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- What are business angels and how they can help fund your business?
- Finding finance for your new business – funding advice for start-ups
- The way to get paid – 12-Step Action Plan to stop customers from paying you late
- 8 signs that a small business may be approaching insolvency
- ByteStart’s Guide to insolvency, liquidation and bankruptcy for business owners
- Improve your cash flow – 7 ways to make sure your business gets paid on time, every time
- 10 late payment excuses used by customers – and how to deal with them