Many of us use credit cards for our personal spending – but is this a good borrowing option for business owners as well?
Credit cards can help individuals and households manage their cash flow by allowing borrowers to defer paying for purchases of all sizes until a later date. In the same way, a business credit card may be worth considering to help a company improve its cash flow position from time to time.
Credit cards can be used for quick injections of cash flow to meet overheads quickly, or to make essential purchases that you will ultimately pay off. They can also be used to cover employee expenses, gaps in revenue or to make large-scale purchases should the need arise at short notice. Ultimately, they give you greater cash flow flexibility to allow you to meet the needs of your business as and when they arise.
Using a business credit card can also give you a better picture of your overall spending. Many credit cards will come with useful analytics tools to help you get insight in your spending patterns. And if all your outgoings are logged on your monthly credit card statement, this can also help you stick to a budget and spot any areas where you or your staff are overspending.
Another advantage is that a credit card can effectively give your business a period of interest-free credit – which can mean as many as 56 days between making a purchase from a supplier and paying it off.
Using a credit card to make a purchase also means that you are protected, even if you’re caught unawares by unscrupulous suppliers or you find your purchase isn’t quite what you may have bargained for.
Many card providers will also allow business owners to set spending limits on specific employees’ cards, as well as block certain merchants if necessary.
As with personal credit cards, you need to make sure that you are fully aware of the terms and conditions attached to the credit card to avoid any unexpected fees. There may also be regular fees associated with having a business credit card, such as an annual card fee.
Interest rates can be high on any spending that isn’t paid off within the initial interest-free period, which can mean your business incurs a level of debt that you're are unable to service.
Rather than paying back the minimum amount of your business’s credit card bill every month, it is sensible to prevent debts from piling up by seeking to pay off the full amount as quickly as possible.
We asked Emily Coltman, chief accountant at online accountancy service FreeAgent, to explain
“A business credit card works much like any credit card, in that the credit card provider will agree to the card user spending up to a certain limit each month using the card. The card user, in this case the business, would pay the spent money back to the credit card company, typically every month.”
“If the business has more than one employee, then each employee may have his or her own card, or possibly only certain employees would have cards, for example managers or travelling sales staff.”
Under normal circumstances, you should not use a business card for your own personal spending: business expenses are typically deductible against tax, and if you mix in personal expenses as well, this can create a confusing situation when it comes to calculating annual accounts.
When your company opens a business banking account, you will normally receive a debit card and the option to take out a credit card as well – but this is not mandatory.
Credit card providers are likely to carry out detailed due diligence exercises on businesses that approach them for credit cards as they are a means of borrowing money, and the lender will want to be reasonably certain that they will get their money back.
This means businesses applying for a credit card, the provider could ask for historic accounts and to enquire into their credit history.
Taking out a business credit card and repaying it on time every month can help you build up your firm’s credit record – and this could come in useful when you need to seeking funding at a later date, whether for large-scale investment, or just a new company vehicle.
