This article is part of a larger series on Best Small Business Credit Cards.
A business credit card can be a great source of funding for your small business, especially if you cannot yet qualify for a business loan. Business credit cards can provide immediate working capital whenever you need it, and most offer rewards on purchases. Plus, they can help you build your business credit, allowing you to access a wider range of financing options later on.
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 of $50,000, and a few have higher limits. However, it’s difficult to qualify for a credit card limit of more than $50,000 as a small business owner, especially if you’re just starting out. If you’re a new business and need financing of more than $50,000, consider applying for other startup business loans.
- You can’t qualify for a bank loan: You may be denied a bank loan due to a low credit score, limited time in business, or lack of collateral, excessive debt, and insufficient income. Moreover, 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 you’ll have access to the original card limit as you pay down the balance on the card.
Advantages of Using Credit Cards to Start a Business
There are many advantages to using a credit card to start a business. Here are some reasons why you should consider a credit card over other forms of financing.
1. No Collateral Needed
Most business credit cards are unsecured. If you have a good to excellent personal credit score, you’ll most likely qualify for an unsecured credit card that offers rewards and perks. Keep in mind that while most credit cards are unsecured, most issuers will often require a personal guarantee as part of the qualification process.
2. Lower Cost of Capital Than Other Unsecured Debt
Credit cards typically have interest rates that range from 12% to 29.99% annually. Looking across all financing options, this is less expensive than some alternative lenders and loans that don’t require collaterals. While business credit cards often charge fees on things like cash advances and balance transfers, you can avoid these additional fees easily with careful budgeting and planning.
It’s worth noting that there are small business financing options that offer much lower interest rates than credit cards; however, these loans require collateral. In addition to requiring collateral, the less expensive forms of financing, such as SBA loans and commercial real estate (CRE) loans, have lengthy application processes, are more difficult to qualify for, and often restrict the use of funds.
Types of Financing & Typical APRs
*APRs are subject to change based on the current prime rate.
3. Introductory 0% APR Periods
An introductory 0% APR period is usually anywhere from six to 12 months, but others offer up to 20 months interest-free financing. Credit cards with 0% APR are useful for small business owners because it gives their business time to grow before they have to start paying for expenses.
4. No Introductory Balance Transfer Fees
In addition to introductory 0% APR periods, many small business credit cards have no fees on balance transfers during the introductory period. This allows you to consolidate your credit card debts at no cost.
5. Signup Bonuses & Ongoing Rewards
Many small business credit cards offer signup bonuses, which are typically in the form of either cash back or points. You’ll earn the bonus after you meet the specific spending requirements, and once the introductory period is over, the cards usually have ongoing cash back or travel rewards in the form of points or miles. Points rewards can also be used as a statement credit or redeemed for merchandise.
6. Reusable Revolving Credit
A small business credit card acts like a revolving credit, which means you can use up to your approved credit limit, pay your credit card balance, and use the credit limit again. Unlike a traditional business loan, you don’t have to reapply every time you need to access more funds.
With business credit cards, you’re required to pay down at least a portion of your balance every month. It’s important to pay off your balance in a relatively short period to avoid high financing costs.
7. Business Expenses Are Tracked Easily
Small business credit cards allow you to monitor any business-related expenses easily. You can use your monthly statements and set account alerts to help you stay on track. In addition, most business credit cards integrate with accounting software, such as FreshBooks, QuickBooks, and Xero, to save time with bookkeeping.
Disadvantages of Using Credit Cards to Fund a Business
Using a credit card to fund your business also comes with risks and drawbacks. You need to keep track of your purchases to avoid overspending and ensure that payments are made on time, as late or missed payments can negatively impact your credit score.
1. Balances Can Accrue Quickly
Since credit cards are relatively easy to use and you can use them almost anywhere, it’s easy to spend beyond your intended budget. If you aren’t careful, your balance can accrue quickly, and you might end up not being able to afford to pay off your balance on time.
2. 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 rate providers charge once you fall behind on payments, which is 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.
3. Future Borrowing Might Be Restricted
Most card issuers will perform a hard credit check when you apply for a card, and this will typically affect your credit score. Also, using up your credit card’s limit can impact your overall credit utilization ratio, which may have a negative effect on your credit. Once your credit score is affected adversely, you’ll have a hard time getting approved for another funding in the short term if you decide to take out a small business loan.
4. Possible Misuse & Abuse
Credit card misuse and abuse are possible, especially if you aren’t being careful. To avoid this, you should identify employees and business partners with access to your business credit card and check your monthly bills to ensure all expenses are approved and accounted for. It’s also important to be mindful of potential identity theft and see to it that all monthly transactions are consistent with the intended use of the credit card.
5. 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 credit card stacking, 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.
6. You’re Typically Liable Personally
Most card issuers require a personal guarantee for a business credit card. If your business fails to repay any outstanding balances, you’re personally liable to repay the debt. If your business is unsuccessful, it can result in putting your own personal credit history and credit score at risk. While this is no different than what’s required for most small business loans, this is something that you should be aware of. Note that there are business cards that don’t require a personal guarantee. However, they typically come with limitations and have more rigid requirements.
How To Use Credit Cards to Fund Your Business
Using a business credit card to fund your business is a good idea if you need immediate financing. It’s crucial to know how to use the card responsibly and make on-time payments to avoid unnecessary fees and keep good personal credit. Proper credit card use can also help you build good business credit, which will qualify you for other business financing options in the future.
Step 1: Identify a Card That’s 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 startup business card that’s designed specifically for your needs.
Step 2: Know the Card’s Fees
Before applying for a card, it’s important to know the fees associated with the card. Business credit cards usually carry an annual fee from $0 to $500 (or even more) and ongoing APRs from 12% to 30%. Ongoing APRs may change depending on the prime rate.
Step 3: Apply for a Credit Card
Generally, you can get a business credit card online in only a few minutes. Credit card issuers 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 business days.
Step 4: Use Your Card for Business-related Expenses
As soon as you receive your card, you can start using it for business-related expenses. Don’t use it for personal expenses, as that would be a violation of your cardholder agreement. It’ll also make it more difficult to track your business expenses, which can cause problems with the IRS when tax season comes.
Step 5: Pay Off Your Credit Card Bill Promptly
As you make purchases on your credit card, you’ll need to pay your credit balance down or pay it off completely to avoid being charged with APR. It’s also important to pay off your balance in a timely manner to avoid late fees and maintain good credit.
Applying for small business credit cards is easier compared to a traditional loan. The best small business credit cards offer introductory bonuses, 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
A credit card might not be the best option if you need a larger loan, your business is already established, or you can’t qualify for a business credit card. In this case, you may want to consider other alternatives 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 your business expenses.
2. Home Equity Loan/Line of Credit
If you’re a homeowner, you can borrow funds 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 it can add significantly to your personal debt, so it’s not a great option for long-term use.
3. Small Business Loan
A small business loan from the SBA offers low interest rates and a limit of up to $5 million. To qualify for an SBA loan, you need to have an already established small business, have good personal credit, be able to demonstrate the need for credit, and have the ability to pay back the loan.
4. 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 in operation for at least two years, and you need to have good personal credit to qualify. Moreover, you must prepare the necessary paperwork to show your revenue history.
Can You Use a Personal Credit Card to Fund a Business?
It’s possible to use a personal credit card for business, especially if your business is new and couldn’t qualify for a small business credit card. Some personal credit cards also offer rewards and perks that may be useful for your business. However, it’s important to keep your personal and business expenses separate to keep your accounting organized and avoid getting in trouble with the IRS.
Most business owners can benefit from using a small business credit card to fund a business—it may be the easiest and fastest way to finance your small business while earning rewards. Just make sure to use your card responsibly and pay your bills on time, as late payments can cause unnecessary charges and hurt your credit score. Also, keep your balance low relative to your total credit line, so your credit utilization ratio remains low. This can increase your chances of getting additional credit in the future.