In many respects, business credit cards are little different to those issued for personal use – they allow spending on credit, with at least a proportion of the balance needing to be paid each month.
Business credit cards may prove only one of a number of sources of credit for businesses in search of short-term funding. It may be helpful, to consider some of the ongoing difficulties faced by small and medium sized enterprises in Britain in securing credit and to compare business credit cards with other possible sources of funding.
Advantages of business credit cards…
The card is issued in the name of the business concerned and may be used to:
- allow staff to make purchases on behalf of your business without the need, time or hassle to complete claims forms for refunds of any of their own money they may have spent;
- give the small business owner an additional line of credit – in addition to other borrowing, such as a loan or overdraft – which might be used to make purchases and manage cash flow problems;
- make purchases for typically up to either 56 days or two months on interest-free credit.
In addition, some business cards may attract an annual administration fee, although others may not. Some cards may also offer, for an introductory period only (typically between 3 and 22 months, depending on the issuer), zero per cent interest on purchases.
…and some of the disadvantages
Perhaps the biggest disadvantage with credit cards issued for business use is the same as those used for personal use – the failure to pay off an outstanding balance at the end of each month.
Opting to pay back only the minimum amount demanded by the card issuer is likely to result in a very long term period of borrowing – significantly increasing the total amount paid on what is already a fairly high rate of interest.
Although you may be tempted into applying for a business credit card because of the introductory period of zero per cent credit, it is important to remember that such a period ends in time. On expiry of that introductory period, you may need to exercise particular caution if you want to avoid hefty, and potentially ongoing, interest repayments. It is important to remember too that zero per cent interest offers and the normal period of 56 days or so period of grace of interest-free credit typically apply only to purchases made with the card – cash withdrawals, for example, are likely to attract interest from the moment the transaction is made.
The amount of the annual for any fee that is charged for the issue of the card may vary widely from one company to another and you are also likely to have to pay for each card used by you and individual members of your staff.
Some issuers of credit cards for businesses may require your company, partnership or sole trading enterprise to have a turnover in excess of a certain limit before you may apply for such credit facilities.
Alternatives to business credit cards
Despite a number of apparent advantages, there are financial risks in reliance upon business credit cards. One of the reasons for businesses using them as a reasonable ready and convenient source of credit, perhaps, is the simply difficulty is securing any alternative.
Bank loans and overdrafts
A traditional source of business funding was the high street bank, where the relationship with the local manager was key to securing funds when and how you wanted it in the form of short-term borrowing. This may have taken the form of an overdraft on your regular business account or a short-term business loan.
This traditional form of funding from banks, however, has become so difficult, if not impossible, for many businesses to secure that Britain has a “broken business finance system”, says the British Chambers of Commerce (according to a report in the Telegraph).
Extreme wariness and reluctance on the part of banks to lend or to arrange overdrafts may have the effect of denying many small businesses of the funds they need if they are to avoid going under, say the British Chambers of Commerce.
This is not just the view of the pressure group for small businesses, however, but has also been demonstrated by evidence collected by an independent government-sponsored appeals system which investigates individual cases of businesses seeking funding being turned down by banks.
According to a report in the Independent newspaper, the appeals system considered 3,518 appeals during the course of 2013 (an increase of 6% on the previous year) and upheld more than 1,100 of those appeals.
The report commented that the figure for the number of business applicants wrongly turned down by their bank may be understated, since many enterprises may not even be aware that an appeals procedure exists.
Even more alarming perhaps is the behaviour of some banks that have made credit facilities available to their business customers. A report in the Guardian newspaper, for instance, casts light on a number of high street banks chasing up demands for repayment of loans by the use of threatening letters made to appear as though they were from firms of solicitors. In many cases, it has been revealed that no such legal firm exists and that the letters have merely been signed by a solicitor who happens to be registered by the Solicitors Regulation Authority (SRA).
The government has tried to address the shortage of funding from banks by setting up in 2013 a new Business Bank, which pools funding from both the public and private sectors for cash to be made available to the banks for lending.
The British Chambers of Commerce has urged the government to make such funds directly available to applicants from small and medium sized enterprises rather than channel the funding through the banking system.
Small business loans
The British Chambers of Commerce has described the vicious cycle by which businesses looking to grow are encouraged to accept new orders rather than decline the opportunity. If they are unable to fulfil those new orders, they risk bankruptcy because of a lack of working capital.
In the absence of the necessary funding from banks in the form of overdrafts and loans, and the very limited usefulness of business credit cards in easing cash flow problems, a further source of finance may be in the form of a small business loan.
For businesses in need of funding quickly – to meet a sudden increase in new orders or to seize an upcoming opportunity, for example – a small business loan, arranged over the internet, may provide the solution.
Typically, applications for this kind of borrowing may be considered by the lender within just one working day, whilst the approved funds may be deposited directly into the business bank account within a matter of hours.
Lenders vary, of course, but typically offer loans of up to £50,000 and are repayable over a term of up to 24 months. You may also find that there is no penalty for early repayment (which may be the case with other forms of borrowing) and the short repayment period means that there is no long term commitment or the danger of indefinitely rolling interest charges that may be faced by continuously using a business credit card.