Business credit cards

Perhaps you’re a small business owner who’s found it difficult to get a traditional business loan. You can of course hit up your network of deep-pocketed friends… but if they aren’t forthcoming, a business credit card can be a good option. Like a revolving credit line, a business credit card can be your emergency lending, up to a limit. This limit will depend on your credit rating, trading history, revenue, and profit.

A business credit card is a useful way to manage cash flow when you don’t have enough working capital. It’s also useful for keeping track of the expenses your staff might incur (several cards can be used on the same account though the credit limit will remain the same).

Once you’ve set up your credit card, you can improve your business credit rating by observing the credit limit and paying back the balance each month and on time.

Otherwise, you can roll over your balance from month to month, paying only the minimum amount required (if there is a minimum), and accruing interest based on the effective APR for which you qualified.

If you run a small company, a business credit card is a simple and flexible way of managing your expenses and ensuring you always have access to working capital.

However, the relatively low credit limits and high interest payments mean that other financing options may be more attractive. Merchant cash advances, for example, offer lump sums repayable via a percentage of your card takings – so if your takings drop, your repayment rate will drop too, ensuring repayments don’t eat into your profits.

Unlike bank loans or credit lines, application for a business credit card is fairly simple – if you have a good credit history and you have established a successful business, you should not find it difficult to qualify. This is of particular benefit to smaller businesses, as they are more likely to experience cash flow issues – and a business credit card offers instant access to extra funds that can be used to purchase stock or equipment, ensuring your business remains profitable.

An additional benefit of a business credit card is that it allows you to build up your business credit – if a lender sees that you reliably pay off your business credit card, they will be more inclined to approve you for a bank loan or an increased credit limit in the future. Some lenders even offer perks such as air miles and cashback offers and, because business credit cards are unsecured, there is no risk to your home in the event that you are unable to pay back your debts.

As with all financing options, however, it is important to be aware of the potential drawbacks. Interest rates on business credit cards tend to be higher than other forms of working capital finance and, along with the annual fee for owning the credit card and fees for late repayments, can prove an expensive option.

The amount you can borrow via a business credit card is also likely to be lower than other financing options, so if you require a lump sum to cover a one-off payment or investment, you may wish to consider other working capital finance possibilities.

You might also want to consider other types of working capital finance.

Within these different types of business loans – of course, there is some overlap between them – you’ll find some that better suit your particular situation, e.g., you might be looking for startup finance, equipment finance, or working capital finance.

Depending on how long you think you’d take to repay the loan, you can consider:

• Business overdraft
• Short-term or medium-term business loans (i.e., working capital loans)
• Short-term business loans – usually between 3 and 18 months (often referred to as working capital loans)
• ‘Term’ loans – usually between two and five years (‘term’ means medium- or long-term)
• Very short-term loans – including revolving credit facilities and other business overdraft alternatives
• Long-term loans – these can run from 3 to 30 years, require monthly or quarterly payments from cash flow or profit, might restrict other financial commitments (e.g., debts, dividends, or principals’ salaries), and can require an amount of profit set aside for loan repayment
• Balloon loans – relatively small monthly payments, ending with final ‘balloon’ payment to pay off the remaining loan balance