Advantages and Disadvantages of Financing Business with Credit Cards
Credit cards can be used as tools in financing a business but before you can do so, it’s important to be aware of the advantages as well as the disadvantages. On this post, let’s take a look at both the positive and negative side of financing business with credit cards.
Advantages of Using Business Credit Cards
Quick and simple. It is generally much easier to get approved for a business credit card than a business loan. The process of applying for a loan can last for weeks or even months. If you own a start-up business, it may even be a lot more difficult to get approved for a loan. On the other hand, you can get a credit card for business within a week and use it immediately to pay for your company’s expenses.
Convenient. When you use a business credit card to pay for bills or purchases, it is much easier to keep track of your spending. This is because each item is reflected in your statement of account. Aside from monthly billing statements, issuers of business credit cards also send annual reports so you can review all your previous expenses for the whole year. In fact, you can use your annual summary of account as a reference in preparing your business taxes.
Easy to Manage. If you have employees, you can distribute supplementary credit cards to some of your staff. This way, they can charge business-related expenses to your account without the need to go through a long process. Since charges will be reflected to the primary cardholder’s account, you will be able to monitor your employee’s spending.
Disadvantages of Using Business Credit Cards
Rates and fees. The biggest disadvantage of financing a business with a credit card is the extra charges. If you fail to pay your full balance on time, you will be subjected to pay the interest rate. Consequently, if you miss your due date of payment, you will also incur a late penalty fee. These extra costs can be burden especially when you have a limited budget. Therefore, business owners who use business credit cards for financing should do their best to avoid these charges by paying their balance in full and on time.
Low limit. The credit limit available to business credit cardholders are limited compared to traditional business loans. This is especially true if you own a secured business credit card. Secured credit cards require the submission of cash deposit which also determines the range of your credit limit. For instance, if you submitted $500 cash deposit, your credit line is also limited up to $500 only. If you are confronted with large expenses, a business credit card will not be sufficient.
Risk of debt build-up. Business owners who use credit cards for financing should be wary against the possibility of overspending. Since you can easily charge expenses to your credit and worry about repayment later, poor management may result to debt build-up. Due to the high rates and fees, careless spending can easily lead to bad credit.