They say there is never a better time to start a business than in a down economy. But if you’re like many others who’ve tried to get a loan or investor capital, you know that money for startups does not come easy.
Whether you are looking to help finance a new or existing business, there may be another option.
A number of small and even medium-sized businesses utilize credit cards to help finance their expenses. Although experts considered this practice ill-advised in the past, today many find it necessary to cover expenses like overhead, travel and entertainment.
If you have previously managed to avoid utilizing lines of credit for these purposes but are now considering it, there are a number of things to keep in mind.
Things to consider
For starters, if you are currently employed and considering starting a new business using business credit cards to finance expenses, then you should apply for the cards now. It will be far easier to obtain credit while employed in a regular job than if you don’t have a steady income.
Credit card financing works especially well for businesses with obvious busy and slow sales periods or short-term expenses. The ebb and flow of revenue will allow you to more easily pay off debt and keep spending in check.
Unexpected expenses are a given in business. Broken equipment, unexpected travel, and last minute client dinners can wreak havoc on your cash flow. Credit cards can be very helpful in the case of such “emergencies.”
Credit cards can also be very helpful if you are looking to keep track of expenses and segregate spending. By using a card, you’ll have an auto-generated, detailed listing of all transactions. In some cases you can even access a categorized expense report so it will be easy to keep a handle on entertainment, travel, office supplies, and other business-related expenses.
Be aware that by charging credit cards to their limit and paying the minimum amount required each month, you’re likely to get yourself in a hole that’s not easy to get out of. Not only can this limit your available credit, but your interest obligation will continue to grow. Moreover, late payments can also cause your APR to skyrocket. Be aware of the 0% balance transfer credit cards that are available in the event you need to change cards.
Obviously, it’s best not to utilize credit cards that accrue interest from the date of purchase due to high finance charges. Rather, seek cards where interest begins to accrue from the date the card’s payment is due. Even better, look for credit cards that provide interest-free financing, at least for awhile.
Not only should you try and stay away from high interest rates, but you also need to keep an eye out for rate and term changes.
Do your research. Read the credit card terms carefully, making sure you understand interest rates, payment requirements, fees and perks.
Keep in mind that credit card cash advances typically carry higher interest rates and should not be utilized to finance your business.
Not only is it important to monitor your own credit card spending, but you will also need to keep close track of usage by any employees who are authorized to use the account.
When to avoid credit cards
My advice is to avoid credit cards as the primary method of financing your business if there are other alternatives available, such as a line of credit from your financial institution, or even p2p lending from an outfit like Lending Club.
Those who are not financially responsible and have difficulty keeping spending in check should probably look extra hard for another method to finance their business expenses.
If you’ve determined that credit card financing for your business is the way to go, take into account that, no matter how many credit cards you plan to utilize, there will be a total cap of credit that will limit the amount you can access.
This is not free money. You will need to come up with the funds to pay all of the bills and, in some cases, will be paying more due to interest rates and fees.
Be prudent by creating a payment plan for business credit card bills from the get go. This will not only provide you with insight into how much money you can afford to spend, but also make you think more about where this money will come from.
Whether it’s personal or business-related, debt is debt, and it needs to be repaid eventually.