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The Pros and Cons of Small Business Credit Card Usage

December 18, 2008

Holding Credit Card ACCION USA If you are like many small business owners, you might be finding it a little harder to get the cash needed to make your budget every month. Perhaps your customers are having difficulty paying for your goods and services on time, making your accounts receivable stretch your cash thin. Or, if you are thinking about starting a new business, strict lending standards are making it harder for you to get traditional bank loans and you may consider using credit cards to finance your business operations. However, you should be very careful when considering this financing option because it is very risky.

Pros:

Credit cards can bridge gaps in inventory and payables - if you are short on cash one month because a purchaser has not yet paid you, you can use your credit card as a way to get short-term cash to finance expenses.
Lower capital requirements - if you are starting a business and have low personal savings, this is a way to get start-up capital. This strategy is risky because if your start-up business fails (and the failure rate is high), you would be left paying high interest debt.
Financial reporting - although you may not know it, using credit cards can be an effective way of bookkeeping as your monthly statements serve as a working cash flow statement. This will not only be helpful around tax time, but will also make applying for business loans in the future more manageable.

Cons:

It gets personal - you are risking your personal creditworthiness by using your personal or small business credit card. If you do not manage your credit card responsibly, it will affect your personal credit score, which can in turn affect your future access to business capital.
Credit cards are expensive - the average credit card interest rate is 14.9% as compared to the average of the lowest rates of small business loans, of around 7%.
Terms can be tricky and variable - credit cards are less straightforward than bank loans, since credit card issuers can change the conditions on credit cards at any time. Such changes are more prevalent today, including increases in interest rates and unexpected slashes in credit card limits that cause you to be maxed out on your card. An APR rise of just a few points can mean the difference of hundreds or thousands of dollars, depending on your business. Be aware of the terms and conditions of your credit card and don't forget to not charge more than 35% of your credit limit.

Read about new credit card legislation