When Should You Use A Credit Card To Fund A Small Business?
Funding a small business with a credit card goes against conventional wisdom. After all, credit cards are essentially short-term loans with very high interest rates, and – depending on the credit limit assigned to your business – may not even offer you a substantial loan amount. To a small business with little capital, turning to a credit card for funding might seem like a risky option, only to be considered when all other alternatives have been exhausted.
Conventional wisdom is not always right, however. When wielded wisely, a credit card can actually be a sensible financing option. Here are five times you should consider using a credit card for your small business:
1. When you need instant, short-term cash flow
In 2017, delays in customer payments were the top finance-related challenge faced by SMEs in Singapore. Delays in payments can cause issues with cash flow management, which in turn can threaten your business if you cannot meet financial obligations.
To help bridge gaps caused by customer delays, pairing your personal or business credit card with a tool like CardUp can be an effective cash flow management solution, as CardUp allows you to make business payments such as payroll, rent and supplier payments – even if your recipients don’t accept credit cards. These recipients do not have to be registered with CardUp either, as they will receive the funds in the form of a bank transfer – this greatly speeds up the payment process, as you won’t need to onboard your payees to a new payment option.
Additionally, for instant cash flow, there’s no beating a credit card. As long as you own a credit card, you’ll receive funding immediately, without the need for applications or documentation. Compare this to other financing options: bank loan applications can take a few weeks to a few months to be processed; an application for a personal loan can take at least a working day to be approved; even liquidating your personal assets or getting help from friends and family can take some time.
Keep in mind, though, that using your credit card to fund a business is best suited for short-term financing needs. CardUp allows you to extend your business payables without having to pay any interest until your credit card bill is due, typically up to 55 days. However, once that period elapses, your remaining credit card bill will be charged at the prevailing interest rates, which could be around 20% to 26% p.a.
2. When you can repay your credit card bill on time
To make the most out of your credit card, repay your credit card bill within the 55-day interest-free period. If you cannot do so, then you’ll need to repay your credit card bill with interest rates ranging from around 20% to 26%. Either way you choose to go about it, you have to be prepared to pay your credit card bill on time.
Making late repayments or missing them altogether can incur additional fees or interest charges, further exacerbating your ability to manage your cash flow. Being tardy with repayments will also hurt your credit score, making it harder to take out business or personal loans.
However, if you maintain an excellent record of meeting your repayments in full and on time, you will build your personal or business credit score, improving your chances of obtaining bigger loans in the future.
3. When you can afford the interest rates
A credit card’s interest rates are quite high, especially compared to bank loans (around 10% p.a.) or personal loans (up to around 20% p.a.).
If you cannot repay your credit card bill within the interest-free period, facing high interest rates may be a necessary price to pay if you need financing immediately. However, you should consider if your rationale for charging your credit card justifies the higher interest rates you’ll be taking on. If you will generate more revenue by charging expenses to your credit card, then doing so can be a good idea. On the other hand, if taking out a credit card loan can’t generate enough revenue to cover the cost of borrowing, then you should look into other financing options instead.
4. When you need to track and automate payments
Another advantage to using CardUp with your credit card is being able to automate the recordkeeping process. This is useful for several reasons:
- Consolidate your transactions in one place. With CardUp, you’ll be able to make all your business payments with your credit card. Your past and future transactions will be automatically tracked on your account dashboards, so you can view and manage them all in a single place.
- Generate useful spending reports. Some business credit cards will generate reports for you, separating your spending into different categories such as travel, dining or entertainment.
- Track employee spending. Having your employees make company purchases via credit card allows you to track their spending. You’ll be able to tell exactly how much and what your employee has spent on, which can be especially useful if your employee is responsible for making small, daily purchases. Additionally, making payments by credit card can be a good deterrent to abuse or excessive spending, as you can set spending limits on your card.
- Automate payments. By using CardUp, you’ll be able to make one-off or recurring payments, as well as schedule payments in advance – this helps your business save time on setting up and processing fixed monthly or quarterly payments.
By automating the recordkeeping process, you’ll get to focus on growing your business instead of spending time manually making and tracking payments.
5. When your credit card rewards you for using it
Another reason you should consider using a credit card to make business payments is that you’re likely to be rewarded for doing so. When you pay using a personal or business credit card, it may offer perks like reward points, air miles, cashback or discounts. Not only will you be saving money on business expenses, you may be able to redeem items or services required for your operations, such as flight tickets for business travel.
By using CardUp with your credit card, you can maximise the rate at which you accumulate these rewards, as you’ll be able to make credit card payments to recipients that typically don’t accept cards. Even with the 2.6% fee per transaction on CardUp, there are many credit cards in the market offering rewards that easily outweigh these fees, allowing you to earn on existing expenses that you are already paying anyway.
Here’s an example of the rewards you could be earning:
|Business payments||Rent: S$7,500 x 12 months
Payroll: S$20,000 x 12 months
= S$330,000 annual spend
|2.6% CardUp fee||S$8,580|
|Total spend on CardUp||S$338,580|
|Rewards earned||474,012 miles (based on 1.4 miles per dollar rate)|
|Actual rewards||5 return business class tickets to Tokyo|
By spending just an additional S$8,580 per annum, you’ll get to redeem five return business class tickets to Tokyo, which would have cost you S$22,500!
Play your cards right
There are plenty of advantages to using a credit card for your small business: it can improve cash flow management, automate recordkeeping and reward you for your spending. However, you should only consider it if you can afford to repay your credit card bill in full and on time – otherwise, credit card debt can easily overwhelm a small business.