Using Your Business Credit Card to Help Run Your Small Business

By Frances Coppola | American Express^® Freelance Contributor
6 Min Read | June 30, 2021

Summary

Keep Cash Flow in Check with Short-Term Working Capital and Rewards Programs

Many business owners find that credit cards give them more freedom to manage cash flow than business loans, especially since credit cards typically have an interest-free grace period of at least a month. This means business credit cards can be a cost-effective means of providing short-term working capital. As an example, imagine a shopkeeper who wants to stock up inventory for the holiday rush. They can use their business credit card to pay for the stock, then pay down the balance using the proceeds from the sales.

Rewards programs like cash back and points can also help business cash flow. Cash back rewards, for example, can reduce the effective cost of business purchases when redeemed for statement credits. Points can be redeemed to help finance travel, whether for routine business trip expenses or to buy hard-working business owners some much-needed rest and recuperation. Businesses can also redeem points to defray the costs of essential purchases like office supplies, or to motivate staff by redeeming points for gift cards.

Pay for Large Purchases with a Business Credit Card Instead of a Loan

Business credit cards can be an inexpensive way to make large, one-off purchases. A business owner might take out a new business credit card with an introductory 0% APR period of say 12 months and a credit limit sufficient to cover the purchase cost with some headroom. Then, the card can be used to make the purchase, and the balance paid down interest-free over the ensuing 12 months. It’s important to note that the minimum payment typically won’t be enough to clear the balance within the 0% APR period, so it’s wise to set a monthly repayment sufficient to pay it off before the end of the promotional period.

Unlike a business loan which generally requires a higher fixed monthly payment, credit cards afford business owners the flexibility to reduce the monthly payment to the minimum if the company suffers a temporary cash flow interruption. The business will incur interest charges after the 0% APR period ends, but it won’t suffer a hit to its credit score or face early termination of the loan.

Manage Business Expenses with Business Credit Card Expense Tracking Tools

Business credit card issuers typically provide detailed statements and online tools that enable business owners to view all their business expenses in one place. The statements may integrate with other business finance software, making it easier to keep track of expenses in real time and potentially eliminating the need to reconcile paper receipts to credit card statements.

This can be particularly useful when authorized employee cardholders must spend on the business’s behalf. Expense management tools generally enable business owners to set spending limits and track employee spending. Usually, employee card expenditures can also be automatically linked to accounting software and receipt management apps, preventing the time-consuming headache of reporting expense claims.

Finance a Startup when Loans are Inaccessible

If you’re starting a small business, obtaining finance to buy inventory or set up a website can be a challenge. For example, small business loans can be difficult to get since the business doesn’t yet have a credit score. Loans also typically have a fixed repayment schedule and interest charges that kick in right from the start. If you need less than about $50,000 of startup finance, a small business credit card could be a good alternative, given the quick access to credit and short interest-free grace period each month.

Similarly, a card with a 0% APR introductory period can be a low-cost way of starting up a business. Business owners may be able to purchase all office equipment, pay for initial marketing and public relations, and run an introductory roadshow without paying a cent in interest – only if the balance is paid off before the end of the introductory period, of course.

Establish and Build a Credit Score with Careful Business Credit Card Use

Many small and new businesses can find it difficult to get financing because they lack a business credit score. But it can be possible to get a business credit card without a business credit rating, particularly if the business owner has a good personal credit score.

Since credit card issuers report how businesses use their cards to credit score companies, using a business card regularly and responsibly can help a business build its credit score. Keeping the average balance well below the card limit, always making payments on time, and paying more than the bare minimum all help to improve a business’s credit score – potentially making it easier to obtain financing in the future.

For more on business credit, read “The Difference Between Personal Credit and Business Credit.”

Tips for Responsible Credit Card Business Financing

Despite the many benefits of using a business credit card for financing, all credit cards must be used responsibly – especially since most business credit cards require business owners to agree they are personally responsible for repaying all debt if the business fails. To responsibly finance a business with a credit card, business owners should aim to always make payments on time and keep a low balance when possible.

Missing a payment, paying less than the minimum, or paying late can mean the business has to pay penalty interest. Penalty interest rates on business credit cards can be as high as 30% APR. It’s also likely to result in a hit to the business’s credit rating.

Spending up to the card limit is fine now and then to smooth out cash flow, but the interest that comes with maintaining a high average card balance for an extended time can be expensive compared to alternative financing such as Small Business Administration (SBA) loans. It can also damage the business’s credit rating since credit score companies typically view an average balance close to the credit limit as a warning sign that the business could be in trouble. If a business constantly needs to run a high balance on a credit card, it might be time to look into alternative forms of financing