Business Credit Card Funding: All You Need To Know

Business Credit Card Funding_ What You Need To Know

All content presented here and elsewhere is solely intended for informational purposes only. The reader is required to seek professional counsel before beginning any legal or financial endeavor.

Often a business owner can be left with expenses, including inventory and payroll, with no available cash to pay for it. This is where a business credit card can provide a convenient solution. Lenders issue a business credit card that is linked to a business account rather than a personal bank account. The funds are renewed automatically and this alleviates the strain on your time and resources by not having to re-apply to use the funds again.

Key Points:
How much funding do I require?
How often do I require the funding?
What amount of interest can I afford to pay?

What is Credit Card Funding?

Just like a regular credit card where you have a limit to how much money will be loaned to you, the same idea is behind a business credit card. The cost of the loan is paid upon the return of the original amount and the price is a percentage of the original amount also known as interest. In our case of business funding, the loan or credit card is extended for the business needs and can not be used for anything else, such as personal expenses.

Using a Personal Credit Card vs. a Business Credit Card

Your first question may be why you can’t simply use your own personal credit card to supplement your business. While you are allowed to use a personal credit card for business purposes if needed, you are likely better off using a business credit card tailored to the needs of running a business.

There are a few key differences between a personal credit card and a business credit card, including:

Rewards specifically for business expenses: Just like your personal income, your business has regular expenses. There are numerous business credit cards available offering rewards, perks, and benefits that benefit the small business owner.

When you use a business credit card to pay for your regular (or unexpected) business expenses, you have a chance to earn cash back, miles, or other benefits. If you choose a business card that matches your company’s current spending habits, it’s a chance to earn rewards or savings for a business expense you already have.

Credit reporting: With a personal credit card, your credit and payment history is reported to the three credit bureaus (Experian, Equifax, and TransUnion) for personal credit. With business funding, the business credit activity is reported to commercial credit bureaus, such as Dun & Bradstreet. This means the business credit activity is not likely to be reported to your personal credit file.

Keep in mind some business card issuers do report credit card activity to the personal credit bureaus, so you should verify this before you select a business credit card.

Credit limits: A business credit card will most likely have a larger credit limit versus a personal credit card. A higher credit limit is useful because it gives you greater spending power to expand your business or cover the larger expenses.
Consumer protections: Unfortunately, most of the credit card protections provided to consumers with personal credit cards do not automatically apply to a business card. This includes added benefits such as warranty extensions, purchase protections, or roadside assistance.

The good news is, these added benefits can be found with some business cards, but you need to verify what coverages it does actually provide.

The card agreement: While you are allowed to use your personal credit card for business expenses, you can’t use a business card for personal expenses. These terms and conditions are found with the credit card issuer

Why you might need to use credit card to fund your business

When a business is getting off the ground, it may have limited access to cash or other loan options. Using a credit card to fund business expenses may be one of the few options available.

Here are two possible reasons for limited cash flow:

Clients delay payments - when clients don’t pay on time, you might experience a dip in cash flow levels.

Supplies increase prices - sometimes, products and tools you rely on a price increase. Such increased expenses can put pressure on cash flow. At times a business owner may also approach a bank for a letter of credit when this occurs.

At times a business owner may also approach a bank for a letter of credit when this occurs. You might wish to find out what is a letter of credit.

Here are key reasons why credit card funding may be advantageous:

Better interest rates - provides access to competitive interest rates and balance transfer periods.
Open accounts - can help you establish another business account, such as accounts that need a minimum opening balance.
Credit has yet to be established - when a business is first starting out, it may be difficult to establish credit, which means you may need to use your personal credit score.
Smaller funding needs - you need a smaller amount, such as less than $50,000.
Flexible funding - a credit card gives you the flexibility to access funds, which is helpful when you can’t predict your expenses each month.

Pros and Cons of Using a Credit Card to Fund a Business

Using a credit card for funding offers plenty of advantages, but there are a few pitfalls to watch out for too.

Best Practices with Business Credit Card Funding

Like any credit card or line of credit, you should do your homework before using this type of funding.

Consider the following:

Decide what you need before you apply - before you apply for a small business credit card, take the time to evaluate how you will use the card for your business. This approach will help you narrow down your options. Remember that a business credit card might affect your personal credit.
Compare several credit card options - this will help you find the one with the most competitive rate and rewards program for your unique business needs. You will also want to consider the fees associated with each card. You might also wish to compare a line of credit vs credit card.
Use the card for business-related expenses only - business cards usually have language written into the user agreement prohibiting using the card for personal expenses.
Pay off the card each month - when you use your card for business purposes, try to pay it off as quickly as possible to avoid paying interest and additional fees.

5 Alternatives to Credit Card Funding

1. Business Line of Credit

A business line of credit is similar to a credit card because it gives your business access to revolving credit. With revolving credit, once you have paid back the loan and its interest, the lender gives you automatic access to draw from the loan again. You only pay the interest and fees associated with the amount you borrow.

Although there are numerous options on the market for a business line of credit, Fundbox has become a popular choice. If your business is U.S. based and earns at least $100,000 in annual revenue, then Fundbox is a great alternative. Fundbox will provide you with quick access to credit.
If you want to know more before you make a choice, check out our list of the best business line of credit providers.

2. SBA Loans

The SBA does not provide Small Business Administration (SBA) Loans. However, it does offer lenders access to capital to provide funding to small businesses. This access allows lenders to offer a wider range of funding and competitive terms.

Fora Financial is one lender offering SBA loans. Fora Financial provides loans ranging from $5,000 to $500,000 and does not require any collateral. They also have flexible repayment terms over 18 months.

3. Commercial Real Estate Loans

Small businesses can use commercial real estate loans to purchase property or rental income. These types of loans provide longer repayment terms and have competitive interest rates. However, new businesses may find it tough to secure funding since many loans require years in business and a 20% down payment.

For businesses interested in a commercial real estate loan, GoKapital is a top choice. Loans can be approved for up to $50 million, and rates start at 6%. Once more, the repayment terms are equally competitive.

4. Borrowing Against Personal Assets

Also known as asset based lending. If you own a home, this might provide an alternative for short-term financing. But it also means taking on more personal debt.

Refinancing - if you have equity in your home, you may be able to refinance the loan and draw out some of the equity to fund the business.
Home equity line of credit (HELOC) - you can also borrow against the equity of your home with a line of credit, which usually has a variable interest rate and lets you borrow funds as you need them.
Home equity loan - similar to a HELOC where you are borrowing against the equity in your home, but it’s typically a fixed interest rate with fixed monthly payments after you receive a lump sum.

5. Personal Funds

Lastly, you can pay for business expenses or funding by using your personal savings. While you will not be increasing your personal debt, it could increase the amount of time it takes to get your business started.

Should You Finance a Startup with a Business Credit Card?

A common question among entrepreneurs is if you should use a business credit card to finance a startup. And like so many answers to questions around business, it depends on the situation and level of risk you’re willing to take.

As mentioned, there are several benefits to using a business credit card, including help with cash flow management, quick funding, and access to introductory purchase APR offers and lucrative sign-up offers for rewards. These are all benefits that are a tremendous help when you’re trying to get your business off the ground.

There are risks with this approach though.

The interest rates are almost always higher with a business credit card. Unless you start off with a 0% interest rate, it’s going to cost you more to carry a balance each month, which means your best course of action is to pay the balance in full each month. And if you do use a business credit card for a cash advance, be prepared to pay quite a hefty cash advance fee.

Most likely you will be personally liable for any balance owed on the business credit card, which means you’re putting your own finances at risk too. There’s a chance your business will not generate enough revenue, so you have to be prepared to pay the balance in some way.

The bottom line is, if the benefits of using the business credit card for a startup outweigh the potential risks, then it’s worth considering, especially if you can find a startup business credit card that aligns with your company spending.

Why Business Credit Card Funding Could Be a Smarter Option

Credit card funding could be the answer if you want to get your business off the ground quickly or need a small amount of funding to reach a business goal. It might only be a short-term solution. However, it does benefit from paying a low-interest rate and the possibility of earning additional rewards or cashback. Credit card funding may be a manageable way to give your business push it needs to get started, grow, for debt financing, or get back on track.

Business Credit Card Funding: What You Need To Know

Key Points: