Pros and Cons of Using a Credit Card to Finance Your Small Business


There are several ways to finance a startup and using a credit card is one of them. This appeals very much to new entrepreneurs who have limited funds to fulfill the financial needs of their businesses. Business owners usually consider credit card financing to start a new business or to cover the operating expenses of an existing business. Financing startups with credit cards is legitimate and easier as well. It could be a great way to finance business purchases if the card has a high credit limit, and a lower interest rate and offers enticing business benefits and perks like cashback, discounts, and free reward points, etc.

Before you consider credit card funding for your small business, below are some pros and cons you should understand to make an informed decision.

Pros of Using a Credit Card to Finance Your Business

Lower Interest Rates

Unlike business loans and other financing options, business credit cards usually come with lower interest rates. Credit card interest rates can vary from 15% to 22%. This makes credit cards a good financing option for small businesses. Even some cards come with 0% introductory APR that helps business owners transfer their debts or other credit card balances to a new card for better and affordable debt consolidation.

No Balance Transfer Fees

Some business credit cards don’t charge a fee when you transfer the balance of another card. A zero balance transfer fee can help you save lots of bucks on transferring balance between cards. For example, if you carry a balance on your old credit card with a higher interest rate, you can transfer that balance to a new credit card without paying a single penny. Such cards also offer a 0% APR rate for a particular period of time enables you to pay down debt easily without paying interest. However, a business owner should get the best credit card that has no balance transfer fee and offers a longer 0% introductory APR period.

You Don’t Lose Any Equity

When you use a credit card for business financing, you incur a debt which is known as liability. Credit card debt is a type of debt financing and when you use debt financing for your business, you don’t sell shares or stock of your business. This means you don’t give up or lose any equity when you use a credit card to finance your startup.

Revolving Credit

Another best thing about business financing with a credit card is that you have access to revolving credit. Once a month goes to an end, you pay off the balance and reuse the credit again for a whole new month. This allows quick access to a high credit limit every month without doing any paperwork again and again. Hence, you should pay down your balance in full every month to avoid any financial charges or fees.

Rewards Programs

Just like personal credit cards, business credit cards have rewards programs that help business owners earn free rewards points, cash back, air mileages, and more. Earned free rewards can be redeemed for particular products or services as mentioned in the credit card agreement. As a result, you can save business bucks that can be used for business expansion or other productive areas of the business.

Better Cash Flow

Business credit cards come with tools like spending tracker in categories, access limitations and more. These tools can help business owners keep an eagle’s eye on cash flow and manage business spending in the best way possible without investing in other tools separately.

Cons of Using a Credit Card to Finance Your Business

It can Build Credit Card Debt

Credit card users tend to spend more than they spend via cash. It usually ends up with a high monthly balance and non-payments. When you miss a single monthly payment of your business credit card, it can build huge credit card debt that will incur high fees and interest rates.

Low Credit Limit

A business credit card may come with a monthly credit limit that is lower than your monthly business expenses. You may not be provided with a high limit to pay for your business costs and expenses. This is the reason, make sure to check the credit limit before you apply for a credit card to finance your small business and choose a card with a high monthly limit.

Can Ruin your Credit Score

When you use your credit card up to the given credit limit and failed to pay the balance in full, this will have a negative impact on your credit score. This can possibly lock you out of other types of business financing like a business loan. In simple words, if you have built too much credit card debt, you may not be able to apply for a business loan or a new credit card.