According to numerous reports published online, at least 2 out of 10 new small businesses fail within the first year of their operations. Financial stability plays a crucial role in this matter, as it can be challenging for new companies operating at a small scale to fund their business without proper monetary support.
As financial institutions might refuse to provide loans to a start-up or a small business due to an increased risk of lending, it only poses a graver issue of procuring sufficient funds for them.
Many new business owners now, however, suitably use credit cards to fund their trade. The increasing popularity of bank credit cards as well as those from Non-Banking Financial Companies (NBFCs) can be due to floating resources available to such companies.
According to recent data published by the RBI, there are more than 57.8 million outstanding credit card users in the country as of August 2020.
Using a credit card to fund new businesses – Important things to know
It is recommended not to use a personal credit card to start and fund a business. Instead, individuals can use a customized business credit card offered by financial institutions. Borrowers gain access to higher credit limits when spending with a business credit card, and can easily manage while keeping track of the expenses.
These financial instruments offer revolving credit, meaning owners can make purchases till their credit limit is exhausted and pay the used amount to restore credit availability. Thus, small businesses have access to easy and flexible financing, which is essential for regular expenses like procuring supplies, meeting operational expenses. Below are thus given the advantages of using these tools, both bank credit cards and otherwise, which one must know about.
1. Building business credit report
As mentioned earlier, lenders may refuse to provide business loans to start-ups and new companies due to a lack of reliable credit history. Using a separate business card allows owners to build a business credit history, which makes them eligible for future loans.
2. Higher credit limit
Financial institutions often consider the founder’s personal credit history along with business credit reports while deciding the credit limit. If the owner meets all eligibility criteria, the financier is likely to approve a higher credit limit. Further, the user can contact his/her financier to increase the credit card limit for higher spending in the future if required later.
3. Competitive interest rates
Depending on the financier, borrowers can avail a credit card with interest rates lower than many business loan products available in the market. Reduced interest rates can play a significant role in annual savings and avoiding credit card debts.
Furthermore, you should know how to reduce your credit card interest and save money to manage the financial requirements effectively.
4. Rewards and bonuses
Credit card purchases also come with several bonuses and reward points that users can earn. Depending on the financier, borrowers can earn rewards points, travel miles, fuel surcharge waivers, and discounts on groceries and clothing.
5. Avail on emergency loans
Some financiers allow cardholders to utilize a specific part of the unused credit limit as a personal loan. In situations such as a financial crunch, borrowers can convert their credit limit to an interest-free loan against a credit card for a specific period of saying up to 90 days.
Cards such as the Bajaj Finserv RBL Bank SuperCard also allow users to avail themselves of such facilities via dedicated mobile apps, thus ensuring minimum turnaround time.
To further ease the process of financing within minimum time, the card’s issuer also offers pre-approved offers on financial products like personal loans, credit cards, and business loans. You can check your pre-approved offer by entering your name and contact details as credentials.
Things to consider before opting for credit card financing for business
Individuals must also consider a few aspects before availing of a bank credit card or that issued by an NBFC to maximize the utility.
Unlike debit cards, credit cards come with a preset cash advance limit beyond which ATM withdrawals are not feasible. Credit card users should keep in mind to never cross the cash advance limit mentioned in their credit card statement.
One of the disadvantages of bank credit cards to establish one’s business is that the financier requires a personal guarantee on the card. In the case of delayed or missed payments, the details can reflect on your personal credit report.
Business cards can be one of the most effective ways to meet a company’s financing needs from the ground up. If you are still unsure about various pros and cons as to using a credit card to fund your new business, get in touch with your selected financial institution’s representative to clarify before applying.
Credit card financing for new businesses – Things you must know
Using funds suitably to establish a business can be crucial in its long-term development. Many new companies rely on open lines of credit which allow them to pay for essential day-to-day supplies quickly.
Using credit card financing should be treated in the same way the owner would have treated a business loan. That being said, bank credit cards or those offered by NBFCs can be much more beneficial than any other form of credit due to the easy availability of finances.
Several credit cards also come with benefits like several offers and rewards. Cards like the Bajaj Finserv RBL Bank SuperCard offer accelerated rewards points as a welcome offer, which can further help cut down on expenses.