Santa Claus comes around just once a year. In the meantime, there are Credit Cards.

Credit Card Financing to Start a Small Business

Startups and small business are not easy to set up. A few make it big and even fewer stay relevant after a certain period of time. The idea for a startup can be one in a million, however, the money required to start one can be along a million as well. Hence, a steady cash flow of money is essential.

People often depend on credit cards to fund or finance their business. In many cases, banks might not agree to provide a loan for a startup or a small business since they are not recognized in the market or due to the lack of a credit report. Using a personal credit card for business purposes carries increased risk especially if the business fails. Due to this, the dependency on credit cards to finance a small business has increased through the years.

How can a Credit Card be used for Small Businesses?

Using a personal credit card is not advised to start a business as the debt keeps accumulating especially if the business fails, it gets difficult for one person to pay back the bill amount in full. However, a business credit card is appropriate for setting up a small business.

Business credit cards come with a higher credit limit as the purchases to start and run a business are high and continuous. With a business credit card offered by the banks, it helps in managing every business expense and also keeping a track of the purchases. This also helps during the credit card bill payment as there is a record.

Benefits of a Business Credit Card

  • With a business credit card, you will also be entitled to a wide range of benefits and offers such as reward points and cashback benefits.
  • If you hold a business credit card, you will be entitled to discounts and offers on travel tickets, dining, purchases, lounge access, and other additional perks.
  • The business credit card comes with an interest-free period of 55 days and a fuel surcharge waiver.
  • The credit card is also enabled with a chip which makes it secure.

Things to Consider While Applying for a Business Credit Card

The business credit card must be used for the company deals through online transactions or through POS transactions. The bank provides an option of withdrawing cash; however, it is not advised as additional interest is charged on the amount withdrawn.

Being a business credit card, it is important to pay the credit card bill on time at the end of the billing cycle or else it might prove to be a drawback to the business.

Credit Limit on Business Cards

The credit limit which the banks offer on business credit cards will depend on your credit history and profile. Along with your credit history, the credit history of your business will also be taken into consideration. The credit history of the founders and key people of the business will be taken into consideration. If you have a good credit history, the banks will approve a business credit card with a higher credit limit.

The maximum credit limit of a business credit card is Rs.25 lakh if you meet the eligibility criteria which will include the location of the business as well as your yearly income.

Pros and Cons of Using Credit Cards for Small Businesses

  • Application procedure

    If you already have a credit card with available credit, it is easier to apply for a business credit card and it increases your chances of getting one. If you have a credit card, you will have a credit score and credit report. You must have a good credit score in order to increase your chances at getting your business credit card approved by the bank. If you don’t have a credit card, it is advised to get one to keep your personal and business finances separate.

  • Revolving Credit

    A credit card offers revolving credit which means you can purchase products till you reach your credit limit and then pay it off. After you pay your bill, you can make purchases again. However, only if you pay your credit card bills on time, you will be given the credit limit. If not, it will affect your credit score negatively and you might need to reapply for a credit card or loan.

  • Keeping equity over your company

    When you finance your business with your business credit card which you have applied for, you will have complete ownership. This can be helpful while searching for investors. Even if there are investors in your business, you will still get to maintain control over your company.

  • Competitive Interest Rates

    Have a credit card with lower interest rates results in a low borrowing rate. In many cases, the borrowing rate which you receive is lower than the interest rates of many business loans. However, this depends on the bank. Interest rates on credit cards varies from bank to bank.

  • Access to Easy Financing

    While operating a small business, access to easy cash is essential. Startups and smaller businesses require access to finance for various kinds of purchases which might come up daily. Supplies, various kinds of equipment and other purchases will need a steady cash flow which becomes easy if you own a business credit card.

  • Rewards

    All credit cards offer benefits and rewards on the purchases you make. Since business credit cards are premium credit cards with a higher credit limit, the offers and benefits you receive are more. Depending on the bank, you can earn airline miles, dining benefits, cashback offers on purchases as well as travelling benefits from purchases made with your business credit card.

  • Build Credit

    If you are new in the startup or small business sector, you will not have any kind of business credit with your bank. Having a business credit card builds your business credit and improves it through the years depending on your spending habits and bill payments. If your business credit is at a good number, it will be easier for you to get a bank loan in the future for your business, if necessary.

  • No Collateral Needed

    With a business credit card, the bank does not require collateral as opposed to a business loan. Since a startup is a new business venture for the person, getting collateral is difficult.

  • Tracking Expenses

    Having a business credit card helps to you keep an electronic record of all the expenses and purchases made on the card. This helps in bookkeeping in the company when it comes to calculating tax as well as accounting.

The Cons of Using Credit Cards to Fund Your Business

With a wide range of advantages, you can get from having a business credit card, there are a few cons as well as it can be risky in the long term.

  • Unlimited Liability

    One of the biggest disadvantages of a business credit card is that the person who applies for it will be completely responsible for the expenses made and the repayment of the credit card bill. On a long-term basis, if at all the business does not work out, the credit cardholder will be responsible for all the charges made on the card.

  • Easy Qualification

    When compared to a bank loan or a line of credit, it is easier to apply for a business credit card and getting it approved as well. Banks tend to readily offer business credit cards as long as you have a good repayment history with any personal credit cards or loans.

  • Issues with Personal Credit

    One of the other disadvantages of a business credit card is that it requires a personal guarantee from the applicant. This means that you will have to give them your identification and credit history to qualify. This can result in issues for your personal credit later when the bank and credit card companies will report your business credit card activity on your personal credit. This will also result in you becoming liable for late payments or any extension of a credit limit.

  • Expensive to maintain

    Business credit cards are expensive as they generally tend to have high annual fees as well as higher interest rates compared to other credit cards. The late fees of a business credit card are also higher.

  • Less Purchase Protection

    When compared to a personal credit card, credit companies do not offer purchase protection for a business credit card. This results in added difficulties in the event of billing errors, fraudulent charges as well as in returning purchased goods.

  • Security Issues

    It is important to implement strict policies about who can make purchases on the business credit card, and what qualifies as an authorized purchase. Your employees might take advantage of a business credit card if it is not monitored carefully.

    Business credit cards are an effective way to start a small business. These are some of the pros and cons of using a business credit card to start a business, however, it is advised to speak to the credit card company and the ban about various other details of the card to know more.

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