Financial challenges are a significant impediment hindering the maturation of startups and SMEs. Unfortunately, it doesn’t get better, considering it’s increasingly problematic for small business owners to source funding from conventional financing options such as banks. Moreover, angel investors and venture capitalists have tightened their pockets and set stringent requirements that rule out some entrepreneurs. 

The good news is that the digital age has seen a rise of other alternative lending options that entrepreneurs in dire need of funding can leverage. For instance, crowdfunding is an accessible and feasible method for individuals to solicit lump sums and an empowering development for many businesses. Also, business owners can finance their ventures using credit cards. 

Credit card financing is a viable and appealing funding method, ideal for emerging businesses with limited financing options. Nonetheless, and akin to any funding option, credit card financing comes along with a few caveats that you must be wary of. Therefore, we have prepared this detailed masterpiece that elucidates more on using credit cards as a financing option. 

The basics of using a business credit card

As the name gives it away, credit card financing can fund an account by using a credit card electronically. Business owners can use a readily available source of funds, although they are typically borrowing the funds and thus carry an interest rate. As such, it’s somewhat similar to standard loans, only that they provide you with a broad scope of floating resources. Not to mention, it’s more streamlined and available than conventional loans since no savings on hand is required to obtain a loan. 

Business credit cards allow you to access money when you need it, keeping your balance positive while you await other funds. For example, if your clientele is late with their payments and you cannot handle your operations, you can turn to a business credit card to provide you with working capital. It’s somewhat similar to a cash advance. 

Note that it’s not advisable for business owners to use their personal credit cards to fund their business. For starters, significant debt might accumulate if their venture hits rock bottom, making it hard for an individual to pay back the bill amount in full. That is, you are solely liable for any debt you incur. Therefore, business credit cards are more viable since they allow a higher credit limit. In addition, they offer online tools that help track your business expenses, and it’s possible to add other users, including investors.

Benefits of business credit cards

The most notable benefit of financing your business with credit cards is that it is a convenient strategy to secure capital. In addition, it’s much more convenient to carry a business credit card in lieu of having a large amount of money when purchasing products. Not to mention, credit cards are feasible for online purchases. 

Other advantages of financing your business with credit cards include: 

• You don’t lose any equity- You don’t have to give up control of your business or liaise with other individuals when making significant decisions, for you solely own the debt. As already outlined, financing your business with credit cards is a form of debt financing. You aren’t liable for selling stocks, which implies that you don’t have to give ownership. 
• Lower interest rates- In most instances, business credit cards come with an interest-free period. No interest is charged on purchases during this introductory 0% APR period. In addition, this form of financing has lower interest rates than other options such as asset-based lending. 
• You don’t need collateral- Unlike banks requiring collateral to approve a loan, business credit cards are unsecured. 
• No balance transfer fee- Most small business credit cards offer no balance transfer fees when using them. This can be a life-changer, since it’s possible to transfer any balance of an existing card to a business credit card without accruing any costs. 
• Sign-up bonuses and ongoing reward programs- If you hold a business credit card, you might receive sign-up bonuses such as discount offers on travel tickets, cash backs, and reward points. 
• Business credit cards bolster your business credit score. 
• Reusable revolving credit.
• Business credit cards make it streamlined to track business-related expenses. Also, they help manage cash flows. Even more, you can integrate some business credit cards with accounting software such as QuickBooks. 

Disadvantages of financing your business with credit cards

• Potential low limits- Considering credit cards are unsecured, you might fail to secure substantial funding to pay for significant capital expenditure. 
• Balances accrue quickly- Unfortunately, the interest-free period doesn’t last forever. After that, you are liable to pay interest on outstanding balances every month. Also, you will pay late fees if you fail to make minimum payments. It can be challenging to settle the interest charges and interest fees if you allow them to accrue. 
• Easy to misuse- Business credit cards are ideal if all stakeholders are responsible cardholders. Else, there is a risk of running up high balances and missing payments. 
• If you have a significant balance, you may not access other forms of credit. 
• Late payments affect your credit score, making it challenging to acquire future financings. 

Things to consider before financing your business with credit cards

Business credit cards might be a feasible funding option, but the wrong approach can negatively impact your venture’s operations. For example, late payments might accrue, leading to high-interest rates and an unfavorable credit score. 

Other factors to keep in mind before using business credit cards are: 

Negotiate for better terms

First and foremost, before applying for a business credit card, you ought to know the type of fees to expect on your card. If you have good credit, you can negotiate a lower interest rate on your card. If any problems arise down the road, it’s paramount to consult your provider to deal with the issues promptly and ensure they are resolved. 

Avoid exceeding your credit limit

Going over your credit limit might attract a higher interest rate. In addition, it would be best to settle credit card debts as promptly as possible.

Also, never use your business credit cards to cater to personal expenses. This is a violation of your cardholder agreement and makes it challenging to track your business expenses and evaluate the overall health of your organization. 

Track your usage

It’s essential to track your credit card usage habits and understand how your finances shift over time. Also, we can’t rule out the possibility of credit fraud. Therefore, keeping an eye on your transactions will go a long way in identifying peculiar activities with your business credit card. Budgeting apps, reviewing transactions in an online account, and utilizing the credit card company’s mobile app are effective ways to check up on your business credit cards.