Starting a business and becoming your own boss can be an exciting venture and help diversify your income streams. But it comes at a cost. Getting a business off the ground and ensuring that it becomes profitable is no easy feat. It takes money to make money, and for new entrepreneurs it will likely involve a slew of costs they didn’t anticipate.
In these instances, many business owners may consider turning to credit cards to make up for shortcomings related to their cash flow. But experts say this can be a slippery slope.
“Small business credit cards are useful tools for managing cash flow and credit for a small business,” says John Cabell, Managing Director, Payments Intelligence at J.D. Power. “However, just like any credit card, using the card within the confines of the business’s monthly budget and minimizing carrying a monthly debt balance is critical to good financial management.”
How small business owners are covering their costs
When it comes to covering any business-related expenses, a 2021 Fed survey shows that loans and lines of credit are the most popular types of financing for small businesses. A close second: Credit cards.
The survey showed that 21% of small business owners submitted applications for new credit cards in 2021. And a December 2022 report from J.D. Power shows that the percentage of small businesses that have revolving debt has grown to 44%, up from 39% in 2021.
Business credit cards can benefit small business owners in a few different ways:
- A credit card can provide them with extra funds to address short-term cash flow issues.
- Business cards with rewards programs can help reduce costs on business-related expenses. The Costco Anywhere Visa® Business Card by Citi, for example, offers 4% cash back on eligible gas and EV charging purchases (up to $7,000 per year and then 1% thereafter), 3% cash back on eligible travel and restaurant purchases; and then 2% at Costco, which includes Costco.com purchases.
- Business cards may offer higher credit limits than personal credit cards. According to MyBankTracker, the average small business credit card limit was $56,100 in 2020.
- Business expenses can be streamlined by providing employees with their own cards, rather than reimbursing them for any expenses made on their personal cards. This can also keep personal and business expenses separate for tax purposes.
- Some business cards offer access to accounting software like QuickBooks or Excel to simplify bookkeeping and expense tracking.
Pros and cons of funding your business with a credit card
There are several benefits and drawbacks to using a credit card to cover business expenses. If you’re considering relying on a credit card for your business, consider the following:
- Faster application and approval process. Credit card applications are generally straightforward and can be completed and submitted online. It’s not uncommon to also receive notice of an approval within minutes.
- Business credit cards can offer rewards that help you save. Depending on what your business expenses are, using a credit card can be an easy way to help you rack up rewards and actually reduce your overall costs.
- Credit cards have steep interest rates. According to the most recent data from the Fed, the average interest rate for all types of credit cards currently stands at over 19%. When compared to the average interest rate on other types of debt, say a personal loan, the interest rate is almost double.
- Credit cards may offer a lower limit than other financing options. While the approval process is faster, alternatives to credit cards may offer higher borrowing amounts and a wider range of repayment terms and plans, whereas a credit card will come with strict monthly payments, interest charges, and fees.
How to choose a business credit card
If you’ve decided that a business credit card makes sense for you and your business, choosing the right card can be a challenge with so many major issuers offering lucrative rewards structures, zero or no annual fees, and other perks and features designed to make managing your business expenses more seamless. To choose the right card, you’ll need to carefully think about the following:
- What kinds of business expenses do you have? Evaluating the kinds of expenses your business has on a regular basis can help you choose a card that already rewards those categories.
- What kinds of fees are you prepared to pay? While some business credit cards don’t charge an annual fee, others charge fees in the hundreds. Take some time to comb over your budget to determine if the benefits and perks offered by a specific card are enough to offset the added cost of an annual fee.
- What kinds of perks will make your day-to-day operations easier? Many business credit cards offer additional perks like access to bookkeeping software or employee cards. This can make running your business a lot less of a hassle. Selecting a card that can help you cut down on time spent on more tedious tasks can free up your schedule for more important to-dos.
“One of the best ways to choose a business card is to assess the type of purchases and spending you need for the business,” says Cabell. “Many cards are geared for maximizing rewards on airlines or retail stores. Others offer cashback rewards programs that are more flexible for a variety of purchases. Other types of cards are set up for certain benefits or low interest rates. Understanding how your business will use the card is key to selecting a card and optimizing the features of the credit card product.”
Business credit cards can provide small business owners with the extra cash flow they need to cover their businesses’ immediate costs and give them the financial breathing room to save for longer-term costs to continue to grow and expand.
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