Why you shouldn't fund your business with credit cards
If you’re still feeling the effects of the recession, you’re not alone.
The 2014 National Small Business Association year-end economic report revealed that more than 60% of small business owners say they still feel impacted by the credit crunch.
Even though credit cards are still small business owners’ top source of financing, plastic clearly isn’t cutting it: nearly 20% of business owners say they wish they could respond to increased customer demand, but simply can’t find affordable capital to finance growth.
If you’re tired of swiping your credit cards at a rate you can’t afford, it might be time to consider a longer-term solution like a business term loan.
Revolving credit cards might seem like the most convenient way to pay your business expenses, but in many cases, they’re actually a liability. Here’s why:
1. Credit cards are a short-term fix, not a one-size-fits-all solution.
A credit card is a good fit for handling small, ongoing working capital expenses, but if you need to make a big one-time investment to finance a long-term plan, you’re out of luck.
For example, a credit card is handy when you need to purchase office supplies on a regular basis, pay for dinner with a client, or book travel arrangements for a business trip. Generally, any type of ad hoc retail spending can be purchased appropriately with a credit card.
In contrast, larger or more investment-oriented spending like new office equipment, new real estate, or bulk purchases of manufacturing supplies are usually better suited for another type of business loan. This is because spending larger amounts on a card ties up your revolving credit load (which also damages your credit score) and comes with greater interest costs — both of which hurt your bottom line.
Additionally, many large purchases require time to begin accruing a return on the investment, so a 6 month to 5 year peer-to-peer term loan can spread out the impact on your budget when compared to a credit card that’s meant to be paid in full every month.
2. Credit cards don’t help build your business credit history.
Responsible use of credit cards can be convenient, good for your personal credit score, and offer certain perks like travel mile rewards and cash back.
However, it’s actually a blessing in disguise when your business’s financial needs surpass the limits of your personal credit: it means you’ve evolved from an entrepreneur with a good idea to a true business owner, focused on scaling your growth.
It’s always a good sign when you’ve incorporated your business, and separated your personal and business finances. However, in most cases, even a small business credit card is tied to your personal credit history. Both your business and personal credit score take your credit utilization ratio into account, so keep this in mind before racking up a high balance.
In contrast, a peer-to-peer business term loan is linked to your business, so positive impacts may show up on your business credit report, letting you reap the credit score rewards of on-time, monthly repayments.
Pro tip: many lenders will consider your personal credit when evaluating your application for a business loan, so be responsible with your cards — even if they’re just for personal or leisure spending! To keep your FICO score healthy, pay the bill on time and in full every month, and don’t max out the card.
3. The true cost is high – and can be unpredictable.
You probably don’t need to be reminded that credit card interest rates are usually higher than a business loan, but it can still be easy to lose perspective. Just remember that every percentage point you’re paying off is money taken directly from your company’s bottom line.
For example, the the lowest interest rate for business credit cards in 2015 is 10.37%, while Funding Circle’s peer-to-peer loans can offer interest rates as low as 5.49%. At less than half the credit card interest rate, that difference could save you a lot of money in the long run!
With credit cards, it’s not enough to think about the initial interest rate alone: you also have to consider fluctuating rates, annual fees, and late payment penalties. For example, most business credit cards come with a variable APR, where the amount of interest you pay on the card balance can increase or decrease depending on the prime rate. If interest rates increased, your payments could also increase.
If you’re feeling trapped by business credit card debt, you can still take advantage of lower term loan rates by using a peer-to-peer loan to refinance your higher-interest business credit card balances. You’ll cut your costs immediately, and can start the transition to relying on more sustainable financing with lower APR, larger loan size, and longer repayment terms better suited to your unique financing needs.
If you’re getting serious about growing your business, a credit card is usually not the right way to go. Are you ready to take your business to the next level? Take 60 seconds to check your eligibility for an affordable Funding Circle term business loan today!