One of the easiest and most convenient ways for a small business to raise money is to use a business credit card. You can get one based on your personal credit score, a factor that makes these cards popular with startups.Even existing businesses find credit cards of this type useful as the bank can issue one to each of your employees making it easy to track expenses and monitor your budget. But selecting the card that is right for your company is important as an incorrect choice can set you back by a large amount of money.
Here's what you need to look out for:
It is practically impossible to get away from the requirement of issuing a personal guarantee for obtaining a business credit card. If your business is structured as a sole proprietorship or a partnership, you are personally responsible for the charges incurred on the credit card issued to it.
If your business is incorporated, the bank would probably still insist that each person with more than a 25% stake in the corporation sign a personal guarantee.
Don't assume that if your business fails, you can walk away from the debt. The personal guarantee that you have issued can be invoked by the bank.
Do you need a charge card or a credit card?
There are significant differences between the two. A charge card requires you to pay off the outstanding amount at the end of each billing cycle. These have high limits and are an ideal fit if you want to use them for business expenses that you intend to pay for in an average of 15 to 30 days.
On the other hand, if you are not sure if you will have the money to pay when your card statement arrives, it is better to opt for a credit card. You can roll over the amount that is due at the end of the month on a credit card. Of course, you will have to pay interest on the unpaid balance.
If you select a charge card you will have to be very careful that you do pay the balance amount each month. If you delay it will attract higher penalties than a similar delay on a credit card.
Check the financial implications Before selecting a credit card, compare the annual percentage rate (APR) that is charged on unpaid balances. A difference of even half a percent can add up to a lot if you plan to use the credit facility on your card extensively.
It is useful to keep in mind that your business credit card may use more than one APR. For instance, there may be a low APR for an introductory period that will revert to the standard APR, which will be higher.
Remember that the APR is distinct from the fees that many cards will charge. Some cards carry joining fees while others do not. In many instances, credit cards that require a joining fee to be paid have benefits that far outweigh the fees.
Do not reject cards that have a joining fee before examining their advantages.
Use the card carefully
The utility of a credit card for a small business is enormous. But you need to understand the terms and conditions that you will be subject to.
If you lose track of your expenses or get caught up in a situation where you have a constantly increasing month-end balance, it could threaten the very survival of your business.