Financing Your Business

The Pros And Cons Of Credit Card Financing

Tapping into credit card financing is an option many small business owners consider. Outlined below are some of the ways entrepreneurs use their credit cards, along with some pros and cons.

Using Credit Card Financing to Build a New Business

Pro: If you are just starting your business and have been turned down for a business loan or don’t yet have a track record, a credit card can be an easy way to finance your business without putting up any collateral or doing a lot of paperwork.

Con: To obtain the business credit cards with the best terms, you need a good personal credit rating. If a poor credit rating has kept you from getting a business loan, it may also keep you from getting a business credit card with terms you are comfortable with.

Using Credit Card Financing to Build Business Credit History

Pro: If you make your credit card payments on time and use a credit card that reports your payment history to business credit agencies like Experian and Dun & Bradstreet, then you’ll be building a good credit history for your business. This practice should make it easier to get other forms of financing down the road.

Con: Interest rates for business credit cards can rise sharply if you make a late payment or miss a payment. And terms for business credit cards can change at the credit company’s discretion, so you’ll want to read the fine print on all business credit card applications and disclosures.

Using Credit Card Financing to Get Business Card-Related Perks

Pro: Depending on the business credit card you use, you may be able to enjoy other benefits, such as earning rewards points for purchases, business travel, or entertainment expenses.

Con: Some business credit cards charge high annual fees in return for those benefits. Be sure to evaluate any fees before getting or using a business credit card.

Using Credit Card Financing to Take Advantage of Low Interest Rates

Pro: Although the interest rates are higher than for traditional business loans, business credit cards may charge lower interest rates than other types of financing.
Con: To avoid interest charges, you need to pay off your business credit cards in full each month. Without careful management, interest payments can spiral upward—especially if you take out a cash advance.

Using Credit Card Financing For Its Flexibility

Pro: With a business credit card, you have the flexibility to use only the amount of credit you need each month. With a business loan, you obtain a lump sum and then start paying it back right away.

Con: If you charge too much on a business credit card and thus increase your credit utilization ratio, it can hurt your credit score. Try to limit your use of credit to 30% of your available credit line. For some businesses, that means the acquisition of several cards to get the credit you need or want.

Using Credit Card Financing for Lower Loan Amounts

Pro: Business loans for smaller amounts can be difficult to get from banks. If you need $50,000 or less, credit card financing can be the simplest way to get it.

Con: The 30-day timeframe before interest charges are incurred can make credit card financing more expensive than a bank loan.

Using Credit Card Financing to Take Advantage of 0% APR

Pro: If you are confident you can make at least the minimum payment on the balance each month, and that you can pay off the entire balance before the introductory rate expires, you can take advantage of credit cards offering 0% APR.

Con: Business credit cards are less likely than personal credit cards to offer 0% APR. Those that do usually run the 0% promotion for a very limited time. You’ll need to carefully manage cash flow to pay off the balance before the low rate expires.

Using Credit Card Financing for Routine Business Use

Pro: Making purchases on a business credit card can make tax preparation time shorter, since many cards will automatically categorize your expenses.

Con: If you use a personal credit card for business financing, you’re commingling business and personal credit. Commingling credit carries risk: it can make it very difficult to write off the cost of credit card financing on your business taxes, and may damage your personal credit rating.

To learn more about financing options for your small business, check out three loan-based methods to get the money you need.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.