What’s the first thing that comes to mind when you hear the word ‘credit card’? In addition to the convenience and ease of use (by eliminating the requirement of hard cash), there is always the tempting proposition of ‘buy now, pay later’. Music to your ears already? But as a small business owner, before you rush to sign up for a business credit card, there are some pros and cons you should be aware of, and that’s what we will get down to discussing here.
As per a report submitted to the Federal Reserve System in the United States in 2010, only 37 percent of small businesses were using credit cards in 1998. Barely a decade later by 2009, a whopping 64 percent of small businesses had signed up for card usage. Today, among the widely used cards globally are those offered by American Express, Bank of America, Chase, Citibank and Capital One.
What you should ask yourself
Before you do decide to go down the business credit card route, put pencil to paper and ask yourself a few basic questions:
Let’s weight in (the pros and cons)!
If this is just the start of your business and you do not have any established credit lines as on date (for example, a startup) then a credit card would be your go-to option, for the reason that it would not require an inordinate amount of paperwork. Plus, being an unsecured loan product, there is no requirement for collateral, making the process still easier. Of course, do keep in mind that your credit score will play a significant role here, as it would for a personal credit card. Lenders are happier extending credit to people or businesses with established credit history, or failing that, a good or high credit score that helps them gauge creditworthiness.
While there are several financing options out there, credit cards do sometimes offer lower rates of interest as compared to say revenue-based financing. But this is where you need to be cautious: make sure that you pay off your credit card bills in time each month, to avoid paying interest and finance charges. If you do fall into that particular trap, extricating yourself can be tricky. Make sure you do not withdraw cash against your card as well.
If you’re looking at smaller loan amounts, a credit card will work for you. So whether it is travel expenses or purchasing low-cost office equipment, a card may just be your best bet, but it will not allow for larger infrastructure-related purchases, so that’s when you need to scout around for alternate sources of funding.
If you’re one of those individuals who times their purchases on cards well to enjoy the interest-free period, make sure you extend the same prudence to your business credit card as well, especially if your card has a limited time (such as introductory) offer of a zero- to low-APR.
As with personal credit cards, a business card also reflects on your credit score. So ensure that your payments are timely, so as to keep your credit information report clear. Want to know how your credit history is faring? It’s simple – call for a copy of your credit report from any of the credit bureaus operational in India today (namely CIBIL, Equifax, Experian and CRIF High Mark).
Do make sure you keep your card secure, as not every business credit card covers the company against misuse or fraud. Ensure that no employee uses the card to charge up expenses of a personal nature, or for any fraudulent or unauthorized purchase. Additionally, when transacting online, your firewalls and security really need to be ramped up, to avoid any instances of card skimming or phishing when making transactions. After all, you don’t want your business to be liable in case of any untoward occurrence.
On a related note, another challenge that a business card can pose is, accountability. If a single card is being used across various functions or departments for example, as a business owner you need to ensure that each expense is correctly accounted for. Hence reconciliation becomes important in order to ensure that the card is used solely for the purpose that it is intended for. Again, do remember that any lapse in what is judged as good credit behaviour can have a direct impact on your credit score. And being a business card, it can also severely damage your company’s credibility.
What you should do
As with any other credit card, you should as a cardholder know where to draw the line, and what constitutes judicious usage as against making spends that you just may come to regret. Yes, a business credit card does come with its advantages, but the onus is on you, as the user, to make wise choices when selecting this option. You should keep in mind alternate options depending upon your business need, if required. The bottom line is though, that should you use business credit cards, ensure that you are well aware of the potential disadvantages and are able to work around those to give optimal benefit to your company.
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