Since the dawn of credit card or having the ability to “charge” an account, consumers have flocked to the idea of buy now and pay later. “In the 1800s, during the westward expansion, merchants use credit coins and charge plates to extend credit to local farmers and ranchers, allowing them to forgo paying their bills until they harvested their crops or sold their cattle.” “In 1958 major banks launched revolving credit, which allowed cardholders to carry their monthly balance forward for a nominal finance charge.” (MacDonald & Tompkins, 2017) Thus began amass influx of consumers and entrepreneurs owing more and more debt. So I have to ask, should credit cards be the best option for a small business? What should owners use and not use them for?
I recently had to work on an assignment where it required me to look at the cash management of my business several different ways regarding a line of credit. A line of credit operates similarly to a credit card. The repayment structure and flexibility are almost identical. The credit owner can request a certain amount, only pay interest on the amount they spend, and either make a full payment or make the minimum payments toward the balance. Additionally, credit cards also operate on a 30-day pay, so an owner has until the end of the month to pay. Thus allowing the owner enough to collect their account receivables to pay the bill or operate off of the retained cash but only paying the minimum.
In the Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur, Steven Rogers and Roza Makonnen stated, “Combined personal and business credit cards are the most common source for business loans.” Even after the financial crisis of 2008, small businesses continue to use credit cards to fund their business expenses. One would think that small businesses would begin to shy away from relying so heavily on their credit to pay expenses but when customers and other businesses are late with account receivables payments, how are they supposed to survive in the interim?
Funding Circle, a direct small business investment site states, “A credit card is a good fit for handling small, ongoing working capital expenses, but if you need to make a big one-time investment to finance a long-term plan, you’re out of luck.” (FundingCircle.com) Small ongoing expenses being, office supplies, travel engagements, membership fees, or small emergency expenditures. On the contrary Funding Circle states, “Larger or more investment-oriented spending like new office equipment, new real estate, or bulk purchases of manufacturing supplies are usually better suited to a term business loan. This is because spending larger amounts on a card ties up your revolving credit load (which also damages your credit score) and comes with greater interest costs — both of which hurt your bottom line.” (FundingCircle.com)
In my opinion, credit cards should only be used for emergency situations or much like what Funding Circle suggested, “small expenditures only.” Mainly because credit cards tend to higher interest rates and if you are unsure about being able to pay the full balance each month; it would not be wise to use for any larger expense because, in the long run, it would cost you a lot more than what the purchase was actually worth. Nevertheless, if you are reluctant to obtain a small business loan or a line of credit because of collateral or personal credit issues, and still prefer to the go the credit route, be sure to shop around for the best annual percentage rate (APR).
MacDonald, J. & Tompkins, T. (2017, July 11th) The History of Credit Cards, Credit Cards.com Retrieved via https://www.creditcards.com/credit-card-news/history-of-credit-cards.php
Roger, S. & Makonnen, R. E. (2014) Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur [Kindle Edition]. McGraw-Hill Education & Amazon Digital Services LLC
Funding Circle (N.D.). Fund Your Business With Credit Cards? 3 Reasons To Consider. Retrieved from https://www.fundingcircle.com/us/resources/3-reasons-business-creditcards/