While a business credit card can be a valuable tool in managing your business expenses, there are pitfalls to avoid. Being aware of the traps can help you manage your business income more wisely and find the best cash-flow solution.
What Is a Business Credit Card?
A business credit card is a line of credit for your business expenses, allowing you to maintain business operations despite seasonal peaks and troughs.
Business Credit Versus Personal Credit Cards
Much like a personal credit card, business credit cards can offer competitive interest rates as well as other options such as reward points and interest-free periods.
However, unlike personal lines of credit, business credit cards can often feature a higher annual fee, minimum income requirements, multiple users and no preset spending limit.
Many business credit card statements have downloadable formats such as PDF and Excel, as well as a breakdown of GST for tax purposes. This is a great advantage, allowing you to integrate your monthly account statements into your accounting management software, such as QuickBooks Online, for easier tracking and finance management.
In addition, many business credit cards can allow you track business spending cycles and trends to assist you in managing your budget. Another prevailing feature of a business card is the fact that liability for the debt can be either personal or joint and several, depending on the card you apply for.
Make a Business Credit Card Work for You
Business credit cards can be a useful tool in managing expenses, but before you consider applying for one you should reflect on your business model to determine the type of card you need.
While some rewards cards can appear very attractive with included insurances, bonus frequent flyer points and uncapped rewards points that don’t expire, you need to be mindful of hidden pitfalls. These may include a higher minimum monthly repayment rate, lack of interest-free periods, high annual fees or wasted rewards benefits.
For instance, an SME owner who rarely travels for business and wishes to repay debts on a short-term cyclical basis would benefit from a bare-bones business credit card with a low annual fee and 51-day interest-free period.
Conversely, an SME owner who travels interstate regularly for business may benefit from a rewards card that offers additional bells and whistles such as bonus frequent flyer points, travel insurance and additional linked cardholders to rack up points faster.
If you spend online globally, you need to be aware of the conversion rates charged for international currency transactions. These can be around 3%, depending on the card you apply for. This can add up on your bill fast, so it’s worth checking the contract terms before you apply.
What Other Options Are Available to Me?
Business credit cards are but one option for SMEs looking to survive the ebbs and flows of seasonal income periods.
Another solution is cash-flow finance, which works as a line of credit but directly manages supplier invoices on time, giving you the benefit of freeing up cash flow so you can inject it into other aspects of your business.
Cash-flow finance would be a more beneficial option for an SME owner who wants to predominantly pay supplier invoices on time while freeing cash flow to take on new deals and diversify or grow the business.
Cash-flow finance can also be an ideal solution for businesses that do not qualify for a line of credit from the banks. This is because unlike credit card approval, which is conditional upon having a favourable credit rating, cash-flow finance uses the invoices themselves as security for payment. In other words, your credit history is generally irrelevant to the loan advance.
Read more about cash flow finance: Is Cash Flow Lending Right for Your Business?
There are many options for businesses seeking cash-flow solutions, but it pays to analyse your business spending trends, hidden fees and charges, as well as what extra benefits you want out of your credit arrangement. That way your credit card will help reward you for your spending, rather than costing you the earth.