Small business credit card pros and cons

Most small businesses will experience periods of reduced cash flow at one point or another. This can be a stressful period for smaller vendors concerned about defaulting on accounts payable or being unable to maintain the business during these times. A business credit card can seem a straightforward solution to immediate cash flow concerns, and most major credit card companies offer cards specifically for small business use.

However, small businesses need to be aware of the potential hazards of the business credit card and consider whether this type of credit is right for them.

CON #1 - Personal Vs Business

The main assumption to overcome before selecting a credit card for your business is that all credit cards are essentially the same and will afford you the same protection and benefits as a personal credit card.  While with personal credit a certain amount of time is given to the consumer to question billing errors, small business credit may not be as generous. Likewise, most personal credit services will facilitate refunds for fraudulent purchases, or damaged and faulty goods but this is not always extended to business customers.

PRO #1 - Emergency funds

Easy access to funds can help keep a business afloat during low inflow periods. A business credit card can help SMEs to purchase basic materials, which keeps operations flowing and avoids disappointing customers. While this should always be a last resort, it may be worth the risk if it means keeping your customer base intact. During periods of solid cash flow it can be just as advantageous to purchase the majority of business-related materials using credit and paying the balance immediately in order to reap the most from credit reward programmes, outlined below.
CON #2 - Damaged credit rating

For SMEs, personal finances are intertwined with those of the business, particularly in the first few years, and defaulting on a credit card payment can damage future credit reports. One way of avoiding this can be to use a prepaid credit card. During times of high inflow, simply top up the card with cash for use during tighter periods essentially creating a debit card with a balance that does not fluctuate along with your bank accounts. Likewise, to keep spending under control, ensure business credit cards are used expressly for that purpose and resist the temptation to use them for personal purchases.

For more information on credit ratings read 'A credit crash course for small businesses' >>

PRO #2 - Reward programmes

Many credit cards offer customers benefits and rewards for frequent use, the most common of which is the frequent flyer programme. It can be wise to research a card that offers you not just the highest, but the most relevant rewards. Airline travel rewards might suit SMEs engaging in frequent business related trips or for businesses with only one owner, while cash back incentives may work better for businesses with multiple owners. Receiving a percentage of credit card purchases back as a cash refund is perhaps the most practical reward and can be a great way to keep expenses down.

CON #3 - Interest rates

This is where business owners get hit twice, once upfront with higher fees and interest rates for purchases and again with fluctuating interest levels. Not only will interest rates be higher than on a fixed line of credit but late payments and balances carried over from the previous month will incur fees. Do research these cards before investing in them as the benefits are usually counteracted with higher, more frequent fee rates. In particular, find a card that does not charge you for every transaction.

PRO #3 - Established record keeping

Not only is a business credit card easier to apply for than other lines of credit such as bank loans, which often require a well-established credit history, they can serve as a well maintained record for business purchases. Not only is this helpful for monitoring expenditure but proves equally useful during tax time.

For an overview of business accounting see read 'Small business accounts receivables and payables' >>

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