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How to Properly Use a Credit Card to Finance Your Small Business

Ruth Hoffmann
Ruth Hoffmann

Credit cards can be an effective way to fund your small business if you pay off your balance each month and take advantage of the many perks available to you.

Financing a small business can be approached from multiple directions. It's important to understand what the market offers you and how to use those deals to their full potential, because this initial stage of your company's development is crucial to its long-term success.

A credit card is one of the more popular methods for financing a small business, but it comes with a few caveats that you should consider carefully. Most importantly, it's not the exact same thing as a small business loan, and it has some different implications that you'll need to be aware of.

 

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The basics of using a business credit card

Using a credit card to finance your small business should be treated no differently from a regular loan in that you have to think carefully about your ability to repay the money and keep your balance in check. However, credit cards can provide you with a lot more in the way of floating resources. They make it easy to get a smaller amount of cash when you need it, helping you keep your balance in the positive while you're waiting to get paid. If some of your clients are late with their payments, it can affect your operations down the line. But that doesn't have to be the case if you can cover the negative balance with the help of a credit card.

In fact, most modern businesses rely heavily on perpetually open lines of credit. This is valid for pretty much all sectors of the market, including larger companies. With that in mind, you should definitely not be afraid to rely on credit lines to supplement your cash flow. In fact, it might be the best option you have in many cases.

Personal credit cards vs. business credit cards

Technically, you don't need a business credit card to run your small business. You can use a personal credit card to handle business expenses, but you may be robbing yourself of potential financial benefits for your business.

One of the biggest benefits to using a business credit card is building business credit. If you use a personal credit card for business expenses, you’re building personal credit, not business credit. Business credit is an important part of your business’s overall financial picture and without it, it may be harder to get a loan.

Another important aspect to consider is financial benefits. By signing up for and using a business credit card, you receive financial perks and benefits associated with that card. These perks include rewards programs and free cards for your employees, should you give them the financial power of a business credit card.

Things to keep in mind about using credit cards

The market is full of business credit card offers, so don't feel rushed to apply for the first one you see. Rather, take your time and compare them properly. Pay special attention to the perks they offer and consider whether they would be useful for your business.

Talk to the different issuers and make sure that you get the full picture regarding what each card can do for you – this is especially true if you're planning to have multiple lines of credit open. Here are six additional pointers for using credit cards to finance your business.

1. Negotiate for better terms.

Credit card deals are open for negotiation for the most part, and you can often get better terms if you have good credit. If you're taking out a personal credit card, pay attention to your credit score. This will be a critical factor in negotiating better terms for the card, and may even unlock special deals that are not normally available.

Have a list of the points or terms you want to discuss when you speak with the credit card issuer. If you can point out some specific information regarding the growth of your business, you should definitely bring that up.

2. Make timely payments.

The importance of paying on time cannot be overstressed when it comes to using credit cards for the needs of your business. Before charging any expenses on your card, you have to be absolutely sure that you'll be able to cover the balance without any issues. Otherwise, you are going to run into some significant debt problems with your company very fast, and they might be bad enough to bring down your entire operation.

Make a budget to ensure that your business is operating within its means. Use the budgeting tools in your accounting software to help you keep track of your financial streams and to notify you when payments are due. Never lose sight of your financial big picture, because the entire future of your company is tied to your success here.

3. Correct problems immediately.

Problems are going to come up in your finances whether you like it or not – and that's actually going to happen quite often. You need to get used to this fact and start preparing to deal with issues promptly because otherwise, the problems will compound and you're going to feel very stuck. Whether it comes from the side of your business, or your own personal finances, it doesn't matter. The point is that you need to be on top of these issues and ensure that they're resolved as quickly as possible.

4. Always watch for better deals.

Even if you're satisfied with your current credit card, you should never underestimate the market's potential to surprise you with more attractive deals. Credit card companies are always looking to entice new customers, and you will find a plethora of deals to browse through if you haven't checked in a while. Definitely set some time aside to see what's available to make sure you're getting a good deal. This is just one part of running your business properly. Staying in touch with current market trends applies not just to your own individual market, but for the financial world as a whole.

5. Track your usage over time.

We already touched on this above, but it's an important point to reiterate. You should pay attention to your credit card usage habits over time. Don't just trust your instincts on this – make sure that you're working with hard data, and that you understand exactly how your finances have shifted over time. There are various modern tracking tools available that can help you get this job done easily and without having to do a lot of mental work yourself. Applications powered by AI can be particularly useful because they can help you identify patterns in your expenses and inflow which would normally not be that obvious. This data can help you make informed decisions as your business grows.

6. Talk to your card company if your situation changes.

You should be open with your credit card company with regards to your financial situation as it changes – even if it's changed for the worse. You'll often find that credit card companies are much more open to negotiations than you'd expect. They have an active interest in helping you repay them, because your profit is directly tied to their own.

It may take a while to decide if using credit cards as a line of credit is the right move for your small business. Take time to make sure you understand the terms and perks of the cards you apply for. As long as you're able to fully repay the amounts you charge on your business credit cards, you shouldn't run into any significant financial problems with them down the line.

Best credit cards to start a business

There are many different credit cards to choose from, and your business’s financial situation will dictate which card is best for your business. Keep in mind your credit score and financial history, both personal and business-related, will be considered when applying for these cards. Here are some popular business credit card options to consider.

  • Capital One Spark Classic for Business. For new and emerging businesses, this is a good credit card option for building credit. It has a $0 annual fee, unlimited 1% cash back on all business purchases, and flexible employee access.

  • Capital One Spark Cash for Business. This card is a great option for small business owners looking to earn cash back on their business purchases. The card offers 2% unlimited cash back and a one-time $500 bonus when you spend $4,500 within the first three months of signing up. The annual fee is also low: $0 for the first year and then $95 per year after that.

  • Chase Ink Business Preferred Credit Card. In terms of travel rewards and other purchasing perks, this card is a great option for SMBs. Cardholders can earn 100,000 bonus points after spending $15,000 on purchases in the first three months. You’ll earn 3X points on the first $150,000 you spend on combined purchases of travel, shipping, internet, cable and phone purchases. It also applies to advertising purchases made on social media sites and search engines. It has a $95 annual fee.

Alternative funding sources

You should also consider your other options before resorting to a credit card as a default choice of financing. Typical financing options include:

  • Personal savings. Oftentimes, small business owners leverage personal assets to fund their business. This can be a good option when you’re just starting out, or if a financial emergency occurs.

  • Small business loans. A major source of funding for small businesses is bank loans. Loans are the backbone of many small businesses, and having a good relationship with a community bank can provide a stable financial future for your company.

  • Family and friends. Much like with relying on personal finances, small business owners will often seek funding from family and friends. This is especially true during the early days of a small business.

  • Crowdfunding is a unique funding option for small business owners. Instead of seeking funding through traditional avenues, some small business owners elect to create profiles on crowdfunding websites and raise capital.

 Additional reporting by Matt D'Angelo.

Image Credit: Kerkez / Getty Images
Ruth Hoffmann
Ruth Hoffmann
business.com Member
I teach coaches, consultants & professional service providers the strategic & psychologically proven frameworks that will help them build a highly influential personal brand profile, grow a highly engaged client base of loyal customers and create strategic marketing systems that will help them sell with ease.