Pros and Cons of Funding Your Business with Credit Cards
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When you own a business, you will regularly find yourself wondering how to best fund it. There can be significant expenses to deal with, depending on the type of business you own, thus you will need access to cash to keep it up and running.
Some business owners will choose to take out a loan from a bank; others will rely on friends and family or even angel investors in some cases. Credit cards aren’t used as a funding source quite as frequently, but they do have their place when it comes to business funding – as long as you have a plan in place to not go into debt. Let’s take a look at the pros and cons of using credit cards to fund your business.
Pro: Zero Interest
Many credit cards offer promotions where you can pay zero-percent interest on your purchases, provided you pay it back within a specific amount of time, which can even last for over two years.
For many business costs, this can be great. If you need to purchase inventory or supplies, charging such a large purchase to a card makes perfect sense. Those types of purchases can be paid back fairly fast, and you won’t pay a penny more than if you had paid cash. Compared to a loan, where interest begins accruing immediately, funding these purchases with credit cards can make sense. That being said, should really only be done if you know you have the cash flow to pay back the charge prior to interest being charged.
Pro: Earn Cash Back or Rewards
Continuing on that note, many cards feature cash back or rewards programs. Both of these offer incentives to use credit cards for business funding. Cash back cards offer a small rebate, usually one or two percent, on purchases made using that card.
If this benefit is combined with a zero-interest promotion or the balance is paid every cycle, the cash back bonus effectively makes the card a funding source with a negative interest rate. Just remember that if you don’t plan on making many purchases on the card, the cash back will be negligible and possibly not worth the hassle.
Con: Interest is Typically Higher
This is a significant drawback to look at when you consider using a credit card as a funding source. Credit cards will, as a general rule, have a higher interest rate than a loan from a bank. This is especially true if you are weighing credit cards against a secured loan. However, this drawback doesn’t apply if you’re pay off your credit card before you accrue interest.
Of course, there are other factors to consider. You’ll have different financial needs when you’re buying office supplies than you do when you’re buying a building to operate out of, for instance. Generally speaking, credit cards can be a decent funding source for your business if the parameters make sense and doesn’t result in debt. If you’re in need of funding and expect to have it paid back quickly, or it’s a routine expense, credit cards can be a good option.
Photo courtesy of: StartupStockPhotos
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