Over the past few years, small business financing has been tight. Companies have continued to run into difficulties with business banking, where requirements for accessing capital remain prohibitive.
As a result, small businesses have turned to alternative financing options such as credit cards, which used in the right circumstances can prove helpful. In fact, those businesses that decide to do so aren’t in the minority. The National Small Business Association's 2001 Year-End Economic Report revealed that 33 percent of companies used credit card financing over a 12-month period.
However, it's important to fully understand the pros and cons as well as the best ways to use credit card financing prior to beginning. For example, credit card financing may not be the best option for young companies.
Xavier Epps, owner of XNE Financial Advising, told Fox Small Business Center that if businesses acquire a large number of debt when young it can have a harmful effect on cash flow later on.
"The owner may need to take a step back, look at the overall operations of a business and consider restructuring, if necessary, to get the business close to break-even before utilizing credit card financing for purchases," said Epps, according to Fox.
Some businesses are choosing to use consumer credit cards to meet their needs rather than business cards. The benefits of the former have been underscored by the protections laid out by the Credit Card Act of 2009, which include regulations against arbitrary increases in credit card rates and rules for bill- due dates, proper debiting transactions and limiting fees, Inc. Magazine explains.
Bill McCracken, chief executive of research firm Synergistics, explained that consumer credit cards can also be better for small business owners, as they are better for carrying balances on long-term investments.
"At the end of the day, the test is not what card are you using, but what was the purpose of the transaction," Jane Shea, counsel at Frost Brown Todd, told Inc., underscoring McCracken’s point.
Small businesses will benefit by keeping strict accounting books, which includes tracking expenses as well as staying informed of interest rate changes. Ultimately, though, companies should keep in mind that credit card financing is far from perfect, and they may want to additionally consider other methods in the future.