Business Credit Cards: The Safety Net for Your Business Cash Flow
64 million credit cards are in issue in the UK to date. And while this number includes consumers as well as businesses, it’s clear that credit cards are a popular method of spreading expenses.
Many of the 5.7 million small businesses across the UK have discovered business credit cards as a useful tool, and by now, there are many providers who offer rewards on specific business expenses. Maybe a business credit card could be useful for you, too. Let’s take a look at the ins and outs of business credit cards.
How do business credit cards work?
Business credit cards are a type of unsecured lending. You can use them in many different ways, and for many different scenarios. Many business owners like them because they allow them to manage cash flow in those cases when there’s not enough working capital available.
Instead of squeezing your cash flow, business expenses can be spread over the next month or even longer. When applying for a business credit card, the provider will assess your business’s eligibility and give you a credit limit which you can dip into when needed. Your pre-agreed credit limit specifies the maximum amount that can be outstanding on the card.
Perhaps the most popular feature business credit cards are known for is the interest-free period, or grace period. The interest-free period varies from provider to provider, but 45 days is common for corporate credit cards. This means that you only pay interest on the outstanding amount once you have exceeded this period. Some lenders even offer up to 90 days without interest.
Essentially, business credit cards are similar to a line of credit, and if you pay back the whole amount within your interest-free period, they may free up some extra cash for your business without extra costs.
Rewards on your credit card
Some business credit cards come with a nice side effect — you can earn points when you spend, get travel rewards, or join a loyalty scheme. For instance, when you’re travelling a lot for your business, getting some money off your flights can be very beneficial. In this case, a business credit card with travel rewards can come in handy.
The key thing to think about is what rewards would be most useful to your business. If you’re running a plumbing business, for example, concierge services as a reward probably don’t make much sense. But maybe cash back rewards or reward points you can use on purchases could be of use.
Once you find a business credit card with the best rewards for your business, it can be a nice addition to the interest-free period. However, for some business credit cards you have to pay an annual fee, so make sure the fees are not higher than the benefits you may get.
Benefits and downsides
Of course, having a business credit card is not all roses. There are some things you need to consider beforehand, and while there are many benefits, there can also be some downsides to using a credit card.
Apart from getting a boost for your working capital when you need it, business credit cards are convenient when you need to get some equipment quickly but you don’t want to restrain your cash flow. With a business credit card, you can spread the costs, so these expenses don’t leave you high and dry.
However, for some purchases, your credit limit may not be high enough. Let’s say an important piece of machinery breaks and you need to replace it as quickly as possible. In this case, asset finance like equipment leasing may be a better option, to keep your credit card limit available for other expenses.
Another benefit of business credit cards is that you can issue several cards on the same account, which means some of your managers can have access to the funds too. This can be really useful to keep track of your business expenses.
Last but not least, using business credit cards can help you improve your credit rating — provided you always pay back in full and on time. This can be useful if you might be looking for funding in the future, because having a good credit rating will often make it easier to get approved for a business loan.
On the other hand, business credit cards tend to have high interest rates, so you should keep an eye on the interest-free period to make sure the interest doesn’t build up. APRs vary but are usually in the 15-25% range, and if you default on repayments, it can be hard to catch up and get back on track.
Alternatives to business credit cards
A business credit card is a good safety net for when your business needs some breathing room in terms of cash flow, but there are useful alternatives too. Revolving credit facilities, for example, are like overdrafts without the bank account, allowing you to borrow cash quickly when you need it.
If you’re looking for a larger amount, an unsecured business loan could be a good option, or if your firm invoices customers, then invoice finance may be another route worth exploring. Whatever it is you’re looking for, there are options out there to provide you with the right finance for your business and situation.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions