Small businesses are often individually owned startups which face tremendous difficulty in procuring loans due to lack of sufficient collateral, credit record and established sources of income. Such businesses then resort to using their credit cards to finance their operations.
Credit cards have become the preferred mode of payment for personal expenses to such an extent that people seldom carry cash even for groceries and daily supplies. Credit cards are cash substitutes, and an instrument for instant payment which is available all the time. Cards also offer fraud protection to the user.
Statistics reveal that since the recession of 2008, banks have restricted their clearing of loans to small businesses and 59% of small businesses were using their credit cards for their business according to a survey in April 2009.
Reasons why small businesses are using credit cards
- Small businesses do not have business credit since banks have too many conditions
- Personal credit cards are the only credit resource they have since they are personally responsible for its payments
- The expense requirements of a small business can be covered by the credit limits of the card
- They can use the funds drawn and are not expected to pay back for some time and can get by with the payment of a small minimum due amount
- Cards can be used for online transactions of the business
- Cards are like a short term loan, except that it can be paid later after the minimum amount has been paid
- Interest is charged on the outstanding amount but is not charged till the billing date.
These contribute to the decision of the entrepreneur to use his credit card for funding his small business expenses. But this can have serious consequences and it is important to use caution before taking this step.
Reasons for caution while using credit cards for a small business
- Credit cards may start with a low or zero interest rate but the introductory offer is short lived and subsequently a double digit interest rate might be charged.
- Late payments are always recorded and go against the user’s credit record.
- The high rates of interest make a small debt multiply rapidly
- The terms and conditions are always a fine print that are not scrutinized carefully
- Paying only the minimum amount due on the card will lead to vicious circle of debt.
However, a small business may not get loans easily and there may not be any other option available. Therefore a credit card used cautiously, after carefully budgeting expenses may serve as a life line. The entrepreneur has to bear in mind his operational costs, and decide on a time frame in which he plans to pay back the outstanding amount.
These moves for smart money management will prove to be the most effective way to derive the maximum benefit from the use of credit cards for the small business without incurring any of the additional expenses in terms of high interest rates or get penalized due to the tough terms and conditions stated for the use of credit cards.
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What are your thoughts on using credit cards to finance your business?