Credit financing is a common practice, particularly among startups and companies that need to cover unexpected expenses. Before you start applying for credit cards, take a moment to understand the risks and benefits based on your business’ developmental stage after all, short-term use can have a big impact on your finances in the long term.
Benefits of Credit Card Financing
One of the primary advantages of a credit card is that it gives you fast access to funds. It’s also flexible use it to pay bills, buy supplies, or get a cash advance to cover payroll. With a card, you can cover emergency expenses or handle unexpected gaps in income without missing payments.
When it comes to convenience, it’s hard to beat a credit card. Opening a credit account requires less time and paperwork than a traditional business loan, and you don’t have to worry about supplying a business plan or presenting your case to investors. You can use it online or in person, and you can even get additional cards for employees and partners.
If you have good credit, you can get business cards with high limits, special signing bonuses and rewards perks. Cards with double airline miles or hotel points can help you rack up free business travel, while special zero-percent introductory APR periods grant you access to capital at no cost for up to 18 months.
Risks of Using Credit to Fund Your Business
Credit cards also come with a significant risk. High spending during the early days of a business can leave you with large minimum payments. Keep in mind that credit cards are usually tied to your personal credit rather than your business credit. This means that each time you’re late or you miss a payment, your credit score takes a hit. Payment problems can also increase your interest rate. If your business goes under, you’re left with debt that can do long-term damage to your personal finances. Pay close attention to annual fees, which can be hundreds of dollars per year; with multiple cards, the fees can add up to a significant expense.
How to Use Credit at Each Stage of Business Development
Credit cards are useful for businesses at each stage of development. For new businesses, the cards can provide startup funding for supplies, equipment, and office space. They also enable you to secure funding if you don’t have collateral, if banks don’t consider you credit-worthy for loans, or you haven’t been operational long enough to get a loan.
For a growing small business, credit cards can cover inventory costs or other expenses that arise when income drops or a client fails to pay on time. If you run a profitable small business, you can use credit to cover emergencies, online payments, and day-to-day employee expenses. The card is also a convenient fast-financing option; since you can access funds immediately, it’s easier to take advantage of great deal on a new computer or a piece of equipment without waiting for a loan.
Using Credit Cards Wisely
Once you have a card, protect your finances by using the card wisely. Each time you make a purchase, update your budget to reflect the higher minimum payment. Pay all bills on time to avoid late fees and damage to your credit score. As soon as you can, pay off balances to reopen your credit and reduce debt. By keeping spending in check, being responsible with payments, and treating balances as seriously as loans, you gain all of the benefits of credit financing and avoid the risks.