Business credit card benefits differ from those of personal cards, and may be helpful to small businesses that experience seasonal highs and lows in cash flow. Small businesses may find that a good business credit card increases their financial flexibility.
Using one responsibly may also help boost a business’ credit score.
Small businesses can experience ups and downs at any point in their lifecycle, but this young decade is challenging many of them far more than usual. One possible tool that could help your business stay on an even keel during tough times is a small business credit card. Used responsibly, small business credit cards can help support your business through rough patches and even help you take advantage of growth opportunities that may emerge.
This article explains some of the ways small business credit cards can help businesses survive the dips and invest for the future, including:
- Smooth out cash flow.
- Provide low-cost financing during interest-free promotional periods.
- Furnish flexibility – let you set the pace of repayment.
- Rewards points or cash back can reduce the effective cost of business purchases.
- Help build your business credit score.
Using Your Small Business Credit Card to Smooth Out Cash Flow
Oftentimes, new inventory has to be purchased and suppliers paid before money comes in from customers. One benefit of small business credit cards is that they typically have an interest-free period on new purchases, which can be as long as 54 days, depending on when in an account’s typical monthly lifecycle you make the purchase. You could, for example, use your card to meet day-to-day business expenses, then pay the card off at the end of the interest-free period. This gives you time to build up cash balances and may reduce or eliminate the need for bank overdraft finance, which can sometimes be expensive. However, you’ll want to check your card’s terms and conditions carefully, since there may be fees for some types of purchases.
While charge cards generally must be paid in full at the end of the charging period, a small business credit card allows you to run a balance on your card temporarily. Although you’ll usually pay interest if you carry a balance from month-to-month – outside of any 0% intro APR promotional periods – this can be a boon if, for example, you have to stock up for holiday sales. You’ll still need to make at least the minimum payment every month, or your business and possibly your personal credit rating can be affected.
Managing cash flow this way with a small business credit card is a matter of balance: they can be a great way to cover short-term cash flow dips, but persistently running balances can work out to be expensive in terms of interest charges.
Using Business Credit Card Rewards and Cash Back Programs
Business credit cards often have rewards programs geared towards the needs of small businesses, which is explained more fully in “Key Differences Between Business and Personal Credit Cards[MA1] .” You can save up your rewards points and use them at the right time for your business. For example, you can use saved points to stock up on essential office equipment and supplies, or to take advantage of temporarily low air and hotel prices for future business trips and conferences.
Making purchases with a business credit card that has an interest-free period and a cash back program can help reduce business costs. It can be tempting to pay suppliers from business cash flow to take advantage of discounts for cash payment, but it may be better to rack up rewards points or cash back, especially if you can use an interest-free promotional period on your card, or if paying cash might lead to bank overdraft fees.
Using Your Business Credit Card for Large Purchases
Small business credit cards can be a good choice for making large purchases, as they typically have higher limits than personal credit cards. If you pay off the balance within any 0% intro APR period, you’ve effectively financed your purchase interest-free while keeping your hard-earned cash for the day-to-day running of the business.
Alternatively, you can choose to pay down the balance over a longer period of time at the card’s interest rate. You only pay interest on the outstanding balance, so unlike a business loan you have control over the amount of interest you pay: the faster you pay off the balance, the less your interest charge. The interest rate on the loan may be lower than on the card, but loans are likely to have additional arrangement fees, early redemption fees, etc. When considering a large purchase, it’s worth evaluating the cost of financing with a business credit card versus a loan.
Building Your Business’ Credit Score
Using a business credit card responsibly helps to build your business’ credit score. This means using your card regularly for purchases, maintaining a balance well below your credit limit, making at least the minimum payment every month, and paying off the card in full whenever you can. It’s a good idea to use your small business credit card to pay suppliers who report to credit bureaus – and it’s OK to ask them if they do.
Building your business’ credit score can help you obtain business finance such as loans and overdrafts, and good credit scores can earn you lower interest rates when you need to turn to those options. Once your business has a good credit score of its own, you might be able to access finance for investment without having to provide personal guarantees or putting your house on the line. Easier access to finance can support your future plans and help you grow your business.