When it comes to business finance, we often talk about debt finance, that is, loans, overdrafts and debt facilities for businesses. However, short term business finance often comes in the form of credit. We took a deep dive into business credit cards, and the pros and cons of using company credit cards.
Credit cards and credit generally can be a convenient form of advance payment for consumers, but also useful for businesses. If used correctly, a business credit card can alleviate many of the day to day running costs much easier, particularly with working capital constraints and late payments from customers, but if misused, the spiralling interest costs can be detrimental for a small business.
In this article, we are going to look at the pros and cons of opening a business credit card account for businesses or an employee.
Perfect for Everyday Spending
It isn’t always convenient to pay cash or go about the lengthy process of applying for a business loan or overdraft. Credit cards can be used to pay for petty expenses, business travel and events, with up to two month’s credit on everyday purchases.
If employees travel abroad, a company credit card can be a useful tool as many credit card providers have additional insurance and money protection in the case of emergencies. Credit cards can be a safer way to pay for hotels, rental cars, and entertainment expenses in comparison to business debit cards. Many vendors such as hotels or car rental companies may also ask for a deposit, which can be paid for by a business credit card.
Building up a Businesses Credit Rating
Over time, using and paying off a business credit card will help improve its credit rating, which might make applying for commercial loans, mortgages or debt finance at a later stage easier, as the company can demonstrate a healthy credit history.
A good credit rating will also influence the cost of capital (interest rate), when borrowing money at a later stage, or perhaps increasing the company credit limit.
Some of the main credit card providers offer excellent rewards programs for regular users. Each time a purchase is made on a company credit card, air miles or rewards points can be accrued and redeemed at a later stage. Rewards are often used for hotel bookings, flight upgrades or entertainment. There are many different types of credit cards, and comparison site such as Bankrate looks at some of the different offers and deals available on credit cards.
Sadly, it’s not all a bed of roses. Credit cards can be expensive, especially if you have a low credit rating or you only clear the minimum balance each month. Where possible, always pay off your balance in full each month. Set up a direct debit payment so you don’t forget. That way, you won’t be hit with steep interest charges on the remaining balance.
Credit Card Fraud
Business credit cards often offer less protection than personal credit cards. It is more difficult to reverse fraudulent transactions and if the card is cloned on a business trip, the company could be hit with all kinds of unexpected charges. There is also a risk of employee fraud. For example, if an unscrupulous employee used a company credit card to pay for non-business-related items, the business might struggle to have the charges reversed. It’s always advisable to have good operational and fraud management procedures in order to keep a close eye on, and report and suspicious behaviour around employee credit card use.
Could Affect Your Personal Credit History
Running up a debt on a business credit card is never good, but are you aware it will affect your personal credit history? You will also struggle to open a business credit card account if your personal credit is sub-prime.
Business credit cards are very useful, but only if used sensibly.