If you’re in need of flexible working capital financing for your small business and don’t qualify for a loan, using a credit card may be the best way to go. Along with providing the money you need, credit cards can allow you to earn rewards on business-related purchases.
Here are a few good reasons to use a credit card to fund your business:
- You need less than $50,000 in financing: Assess what purchases you plan to make with the card carefully. Most small business credit cards have a peak limit at $50,000, and a few have even higher limits. However, it’s difficult to qualify for a credit card limit of $50,000 as a small business owner, especially if you’re just starting out. If you are starting out, and think you need financing of more than $50,000, consider applying for other startup business loan options.
- You can’t qualify for a bank loan: You may be denied a bank loan due to a low credit score or lack of collateral, excessive debt, or insufficient income. Also, banks prefer to give loans to existing business owners. A traditional bank or Small Business Administration (SBA) loan can be time-consuming and difficult to qualify for and doesn’t include the perks, rewards, and bonuses that many business credit cards offer.
- You need fast or flexible financing for your business: Applying for a credit card usually results in fast approval and avoids the paperwork required for a bank loan. Once you’re approved, you have a revolving line of credit, which means that as you pay down the balance on the card, you still have access to the original card limit.
Advantages of Using Credit Cards to Start a Business
There are many strong advantages of using a credit card to start a business. Here are some reasons why you should consider a credit card over other forms of financing.
Lower Cost of Capital Than Other Unsecured Debt
Credit cards typically have interest rates that range from 13.24% to 29.99% annually. Looking across all financing options, this is less expensive than some alternative lenders and alternative loans, but there are many small business financing options that offer much lower interest rates than credit cards. While business credit cards often charge fees on things like cash advances and balance transfers, you can easily avoid these additional fees with careful budgeting and planning.
Types of Financing and Typical APRs
Typical Annual Percentage Rate (APR)
5% to 11%
Commercial Real Estate Loans
5% to 12%
Small Business Credit Cards
13% to 30%
Small Business Line of Credit
10% to 50%
Introductory 0% APR Periods
An introductory 0% APR period is usually between six and 12 months, during which there’s no interest charged on purchases. This is useful for small business owners because it gives your business time to grow before you have to start paying for your expenses.
No Introductory Balance Transfer Fees
In addition to introductory 0% APR periods, many of the best small business credit cards offer no fees on balance transfers during the introductory period. This means you can transfer the balance of an existing credit card that’s being charged interest to a no-interest card at no cost.
Signup Bonuses & Ongoing Rewards
Many small business credit cards offer a signup or welcome bonus and ongoing cash back or rewards points. The signup or welcome bonus is either cash or 25,000 to 50,000 points or more if you spend a certain amount within the first three to six months of owning the card.
Once the introductory period is over, the cards usually offer ongoing cash back or rewards points, usually between one to five points per dollar spent. Points can be redeemed for travel rewards―toward hotels, gas stations, restaurants, and more―and sometimes even cash.
Reusable Revolving Credit
A small business credit card is revolving credit. Revolving credit means you can use up to your approved credit limit, pay your credit card balance down or pay it off completely, and use the credit limit again. Unlike a traditional business loan, you don’t have to reapply every time you need access to more funds.
You are required to pay down at least a portion of your balance every month. It’s important to make sure you can afford to pay off the balance in a relatively short amount of time to avoid high financing costs.
Track Business-related Expenses Easily
With a small business credit card, you can track any business-related expenses easily. You can use your monthly statements and set account alerts to help you stay on track. In addition, some business credit cards integrate with accounting software programs, such as FreshBooks, QuickBooks, or Xero, to save time with bookkeeping.
Disadvantages of Using Credit Cards to Fund a Business
Sometimes, a credit card may not be the best choice to fund your business. Keeping close track of your purchases on the card is essential. Making late payments, or failing to make payments at all, can affect your credit status for years to come.
Balances Can Accrue Quickly
If you use a credit card to fund your small business, it’s important to make timely payments. Once the no-interest period ends, you’ll be charged interest each month on outstanding balances and late fees if you fail to make minimum payments. Interest charges and late fees can add up quickly and can be difficult to pay off later.
Penalty APRs Can Increase Cost of Capital
While it’s possible to use credit cards to lower your cost of capital, this won’t be the case if you fail to make a payment and end up being charged a penalty APR. The penalty APR is the rate providers charge once you fall behind on payments, and it’s typically about 30%. You could talk to the card issuer and try to negotiate a new rate, but the best course of action might be to transfer the balance to a new credit card or seek out a less expensive form of financing.
Future Borrowing Might Be Restricted
To get a business credit card, credit card providers typically look at the creditworthiness of the business owner. This usually involves a hard credit check once you apply. If you reach your credit limit quickly, this can affect your credit utilization ratio. These factors can keep you from getting another loan in the short term if you decide to take out a small business loan.
Late payments will impact your credit score, which will make it harder to obtain future financing.
Misuse Is a Possibility
If you have employees or business partners, you should identify who can use the card and for what purpose. Be sure to check your monthly bills to ensure all expenses are approved. It’s also important to be mindful of potential identity theft. Make sure that all monthly transactions can be accounted for and are consistent with the intended use of the credit card.
Credit Limits Are Relatively Low
If you’re using a credit card to start a business, you’ll be restricted to an approved credit card limit. Most often, small business credit cards have credit limits up to $50,000, which might not be enough to fund your business. For larger borrowing needs, you can seek out other financing options. One solution is to stack credit cards. Credit card stacking is the practice of applying for multiple credit cards to have a much larger line of credit. You can do this yourself or pay a company to do it for you.
You’re Typically Personally Liable
If your business fails to repay any outstanding balances, you are personally liable to repay the debt. Credit card providers require a personal guarantee that you will make payments and that those payments will be made on time. If your business is unsuccessful, it can result in putting your own credit history and credit score at risk. This is no different than what’s required for most small business loans. However, it’s still an important consideration and can be a drawback.
How to Use Credit Cards to Fund Your Business
Choosing the best credit card for your needs isn’t only about finding the best rate. It’s about finding the best fit for you and your business by considering fees, rewards, bonuses, and what purchases you plan to make with the card.
1. Identify a Card That Is Right for You
There’s a wide variety of cards that offer cash back rewards, travel rewards, points rewards, or low interest. Determine the best business credit card for you based on your specific business situation, including the type of rewards you want. If your business is a startup, consider a card that’s designed specifically for your needs. Also, it’s possible to use a personal credit card for your business as long as purchases are managed responsibly.
2. Know the Card’s Fees
Before applying for a card, it’s important to know what type of fees to expect on your credit card. Business credit cards usually carry an annual fee between $0 and $500 or even more, and ongoing APRs between 13.24% and 29.99%.
3. Apply for a Credit Card
Generally, you can get a business credit card online in only a few minutes. Credit card providers typically require you to provide your basic personal and business information. Once approved, you’ll usually receive your card in the mail within seven to 10 days.
4. Use Your Card for Business-related Expenses
You can start using your card for business-related expenses right away. Be sure not to also use it for personal expenses as that would be a violation of your cardholder agreement. It will also make it more difficult to track your business expenses and see how well your business is doing.
5. Pay Off Your Credit Card Bill Promptly
As you make purchases on your credit card, you will need to pay your credit balance down or pay it off completely to use it again. It’s also important to pay off your balance in a timely manner to avoid any interest charges or late fees.
Getting a small business credit card can be quick and relatively easy compared to a traditional loan. The best small business credit cards offer introductory bonus offers, various ongoing rewards, and low introductory and ongoing APRs. If you’re looking for the credit card that best suits your business, you can search and compare credit cards through our Credit Card Marketplace.
Alternatives to Credit Card Funding
If you think you need a larger loan, if your business is already established, or if you can’t get a business credit card, the following alternatives might be a better choice to fund your small business.
Bootstrapping is using your own personal funds to get a business started. It may be a good choice if you’re not in a rush to grow your business. It will require some financial planning on your part to separate your personal expenditures from those of your business.
Home Equity Loan/Line of Credit
If you’re a homeowner, you can borrow against the equity in your home. Home equity loans tend to be fixed-rate, while home equity lines of credit (HELOC) typically have variable rates. This may be a good source of funds in the short term but, for the long term, be aware that it will add significantly to your personal debt.
Small Business Loan
A small business loan from the SBA offers great low interest rates and a limit of up to $5 million. You need to have an already established, qualifying small business, have good personal credit, and be able to demonstrate the need for credit and the ability to pay back the loan.
Small Business Line of Credit
You can apply for a business line of credit through your bank, credit union, or an online alternative lender. Typically, your small business needs to be two years old or more, and you need to have good personal credit and the paperwork to show your revenue history.
If you’re thinking about how to fund your business, consider that most businesses can benefit from using a small business credit card. It may be the easiest, fastest way to finance your small business while earning rewards. If you go this route, be sure to stay current with your payments. Late payments can hurt your credit score. Also, keep your balance low relative to your total credit line. This will keep your credit utilization ratio low and increase your chances of getting additional credit in the future.