According to conventional wisdom, you shouldn’t keep balances on your credit card. Many small businesses are surprised to learn that it can actually be financially wiser to borrow on a credit card instead of taking out a business loan.

Here, we share the top 4 reasons why you should consider a credit card next time you need to borrow money for business expenses. We also tell you how to be smart when using credit cards to fund your business.

4 Reasons You Should Use a Credit Card to Finance Business Expenses Instead of a Traditional Loan

1) It’s Cheaper!

Credit cards are a cheaper form of financing than many other types of business loans. Bank loans are still the cheapest by far, but only about 20 % of small businesses qualify for a bank loan these days. If you’re not among that small percentage, you’ll have to find an alternate source of capital.

This is how the most popular non-bank business financing options stack up when you convert their cost to an Annual Percentage Rate (APR):

  • Credit Cards: Around 16 %

  • P2P loans: 14-29 %

  • Non-Profit lenders: 18-35 %

  • Invoice Factoring: 28-60 %

  • Short-Term Lenders: 40-80 %

  • Merchant Cash Advances: 80-130 %

As you can see, after bank and SBA loans, credit cards are the most economical way to fund your business. Of course, there are benefits to using the other options listed. For one thing, lenders may provide larger amounts of capital than you can get access to with a credit card. In addition, you have to have good credit (FICO score above 600) to qualify for a good credit card. This isn’t the case with all business loans. Credit cards are a good option primarily for business owners with good credit who need to fund smaller purchases.

2) More Flexible Form of Financing

Credit cards offer greater flexibility than other types of financing. When you take out a loan, you have access to a fixed amount of money and must pay back a fixed amount each month. In contrast, on a credit, you can borrow as much or as little as you need each month (within your credit limit of course), and the minimum monthly payment is tiny.

3) Rewards, Rewards, Rewards

Most credit cards have rewards points and sign on bonuses that let you earn money just by using your credit card. One of my favorite credit cards for small business owners is Chase Ink Plus, which currently lets you earn 50,000 bonus points (redeemable for $625 in travel) when you spend $5,000 or more on your card within the first 3 months after opening an account. After that, you can earn 5x points on office supply purchases and your phone/Internet bill, 2x points at hotels and gas stations, and 1x points for most other purchases.

4) 0 % Promos on APR and Balance Transfers

A lot of credit cards offer 0 % interest on purchases and balance transfers for anywhere from 6 to 21 months. Technically, this means you could borrow for free if you rack up a balance but pay it off in full before the intro period ends. Some cards, including Capital One’s QuicksilverOne and Chase Slate, also waive balance transfer fees. No other business loan product that I’m aware of offers these kinds of incentives.

How do the popular cards stack up against one another? Here is comparison of the business credit cards from Fit Small Business.

How To Be Smart About Credit Card Usage

Using a credit card definitely has its benefits, but you do need to be careful when using a credit card for your business.

1) Treat a Credit Card Like a Loan

It can be tempting to let your balances pile up on a credit card because, unlike a loan, there’s no deadline for paying back the money you borrow. To keep your interest as low as possible, make a list of essential business expenses. Only use your card to buy those essentials. If possible, use up no more than 30 % of your credit limit each month.

If you must keep a larger balance, try to pay more than the minimum monthly payment to keep your interest as low as possible.

2) Avoid Fees When Possible

Annual fees, balance transfer fees, and cash advance fees can all add up and increase the cost of borrowing on a credit card. If you are struggling with debt, then it’s probably wise to find a credit card with no annual fee. If you need to use your credit card to withdraw cash on rare occasions, there are also cards with no cash advance fees (don’t do this regularly because cash advance APRs are often higher than purchase APRs). Lastly, if you want to consolidate your debt onto one credit card, consider getting a card that waives balance transfer fees, if even for a limited time.

3) Keep Business Partners In The Loop

It’s important to be upfront with your business partner(s) about credit card usage. You should have a written agreement that answers, at a minimum, the following two questions:

  • What percentage of business revenue will go towards paying off credit card debt each month?

  • If the business fails, and the partners have to use personal finances to pay back the balance, how will the balance be divvied up?

The first question helps you maintain a low balance. The second question protects the named cardholder’s credit score from plummeting if all the business partners don’t pay their fair share of the credit card balance.

4) Get the Highest Credit Line You Can

One of the disadvantages of using a credit card is that you’re limited to the size of your credit line in what you can buy. Over time, however, you can expect an increase in your credit line. For instance, Capital One promises a credit line increase when you make 5 on-time payments on their Platinum Credit Card. If your credit card company doesn’t increase your credit limit within 5-6 months of opening your account, call or email them. If you have a history of on-time payments and your account is in good standing, the issuer will most likely increase your credit line to retain you as a customer.

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You may not have thought about using a credit card to fund your business, but this can actually be less expensive than getting a business loan. In addition, there are other perks that come with using a credit card, such as rewards points and 0 % APR promos. Just use our tips above to make sure you are borrowing on your credit card as wisely as possible.  

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