Should Your New Business Get A Credit Card?

New businesses credit card offers typically fly through the door the second a business opens its doors. Many of these offers will promise 0% interest or low interest for a period of time. They claim automatic approval and many other benefits. Before accepting your business credit card with instant approval, consider when and how you will use the credit. Also consider the benefits of other types of financing than business credit cards, such as investor financing and loans.

Advantages of Business Credit Cards

Most businesses operate on a debt cycle. This means they go into debt for a period of time to pay overhead costs such as rent, salaries and other basic needs. When sales are high and profits are booming, the debt is paid off. Because businesses cannot often anticipate when they will be in the red and when they will be in the black, revolving credit is a good option. Revolving credit, like credit cards, allows a business to go into debt when it needs and pay off the balance when it can.  

A second major advantage is the business credit card rewards many credit card companies offer. For example, using your business credit card or debit card for an online purchase may get you free shipping. You may also receive rewards points for airline travel or other business expenses. Some cards offer you the chance to spend a minimum amount each month to be a preferred member; this will give you priority treatment for a number of unique events. 

Disadvantages of Business Credit Cards

New businesses rarely have a precise idea of their exact profits each year. This means it will be hard to tell in the beginning how much a business can afford to spend and still build business equity at the end of the day. Using a credit card for all purchases can be risky. If a new business finances a number of purchases on the card then does not make enough revenue to pay down the balance, the interest payments can get very expensive very quickly. 

Furthermore, it is often difficult to maintain a budget when a business is using a credit card. Utilizing a direct loan or a debit card only tends to keep the spending in check more than purchasing everything on credit. A new business in particular needs to spend cautiously until expenses can be worked out and financial projections can be met. 

Alternative Business Financing Options

Seeking a secured loan is one alternative to business credit cards. By placing a home, car or business as collateral, the borrower will get access to less expensive financing. Paying off the installment loan is a good way to build credit. It will also cap the spending a business does in its first few years.

Unsecured loans tend to be more expensive, but many businesses use these to secure additional financing. It is common to offer equity or profit share for the lender willing to extend an unsecured loan. These are often called subordinate loans because they will be paid off after all secured, senior loans have been paid in the case of bankruptcy.