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How to use a credit card to fund your small business

If you’ve recently started a new small business or are thinking of starting a small business, you might be concerned about where you’re getting the funds for this venture. There’s a wide range of options for getting funding, but not all will be right for all businesses or business owners.

One of the most commonly used methods of sourcing funding for your small business is to use a business credit card. This can be a flexible and convenient way to access credit as and when you need it, which is essential, as the average small business needs around $10,000 of capital.

In this article, we’ll go over some of the main things to consider when considering using a credit card to fund your small business, as well as how to pick out the right credit card for your needs.

What is a business credit card?

A business credit card is similar to a personal credit card but with a few critical differences. The most obvious is that a business credit card will be for business use, and the debt will be linked to the business. It means that you will have a specific card for your business use and need to keep your personal payments on a different card. This can be very helpful as all your payments are separate, and you can keep track of your personal and business finances independently.

Business credit cards might also have additional criteria to fulfill for eligibility, such as a minimum monthly revenue for your company or a minimum trade history for the company.

Shop around for the best deal

Before you start using a credit card for your small business, you should ensure that you get the ideal card for your business’s needs. Each small business will be different, so the right card for you will differ from what others might choose. This is why it’s so important to compare your options carefully. Some of the things to take into consideration include the following.

Look at the interest rate

One of the main factors with any credit card is the interest rate. You’ll want to ensure you get the lowest interest rate, as this will reduce your debt when a monthly bill isn’t entirely settled. Many small business owners may be disappointed that business credit cards often have higher interest rates than personal credit cards, so you should take your time to compare offers.

Consider any collateral required

Some credit cards or other funding options might require your business to deposit collateral. You should always read the fine print to see if you need to put down some kind of collateral. Alternatively, you may be asked to make a personal guarantee or assurance that you will repay the loan even if the business can’t.

Find the best extra benefits for you

Many credit cards offer incentives and extra benefits to encourage new applicants. It could range from introductory rates to cashback, air miles, or other bonuses. These could be very attractive, but you should weigh them against the interest rate and other terms.

“There are many benefits to using a business credit card to manage your business expenses. Cashback offers and discounts with partner brands are just some of them. However, they only make sense if you pay off the balance in full each month and never go over your limit. Otherwise, the interest you pay will outweigh the rewards.”

Damian Brychcy, COO and US MD of Capital On Tap

Look up reviews

It’s always worth looking up reviews of any financial product you’re considering. This helps ensure you get unbiased views from people who have used the product.

How to best use your business credit card

Once you have selected the right business credit card for your small business, you need to ensure you are using it correctly. Here are our top tips.

Make sure everyone in the business knows when to use the credit card

If you have multiple employee credit cards, everyone must know when it’s appropriate to use it. This usually means ensuring that only the credit card covers legitimate business expenses. You’ll also need to decide if any large purchases should be covered by a business loan that has different terms.

“It’s essential for new business owners not to blur the lines between personal and business finance. Since business expenses are generally tax-deductible, keeping personal and business expenses separate will make your life easier when it’s time to prepare your annual accounts — and even more so if the government ever carries out an audit.”

Damian Brychcy, CO0 and US MD of Capital On Tap

Pay off the credit card on time

It’s vital always to pay off your credit card on time. This helps avoid additional fees and interest charges from accruing. You should also consider whether you want to pay off the minimum each month, or whether you want to pay off some of the loan balance. Paying off the minimum means that you will accrue more interest over time, but it can help when cash flow is slow. Being able to pay for big purchases over many months is often vital for small businesses, and you won’t be alone – delaying payments has increased by 50% over the last few years, showing how valuable it is, as long as you’re sure to pay off the minimum each month.

Make purchases on the card with payment protection

You should always look at which purchases will be eligible for payment protection through credit cards. For example, if you book a flight with your credit card, you might be eligible for protection if the flight is cancelled. This can make it valuable to have a business credit card even if you don’t need additional capital.

Track your usage over time

Tracking how you use the credit card can help make sure that you’re using it to full effectiveness. You might find that you are constantly near the limit of your credit, which means that you should increase your credit. Or you might find that you need a lower credit limit, which could mean you are eligible for lower interest rates.

Change your credit card if your situation changes

If your business changes, for example, it grows or contracts, you should reassess your funding to make sure that you’re still on the best deal for you. This can help save you money in the long run.

Credit cards for small businesses: Summary

Plenty of small businesses use credit cards for funding. Credit cards can be a convenient and simple way for multiple employees to pay for business-related expenses, and unlike having a debit card, they can allow you to extend credit when you need to.

However, you should always be thorough and do your due diligence when you’re picking your business credit card. Factors to consider include the interest rate, and additional benefits such as payment protection. Once you have a credit card for your business, make sure that everyone is on the same page about usage, and choose a repayment plan that suits your needs.