Benefits and Hazards of Using Credit Cards to Finance Your E-Commerce Venture
Since no banks are willing to lend to a business that is only a concept and nothing else, it can be difficult for e-commerce business owners to get loans for operational expenses. Typically, it boils down to the entrepreneur using his personal savings or swiping credit cards to make the business grow. However, using credit cards to finance businesses can be a tricky proposition.
While there are indeed a number of advantages, business owners also need to reckon with quite a few drawbacks. Some of the benefits and risks of using credit cards for funding e-commerce businesses examined:
Top Reasons Why Using Credit Cards for Funding Businesses Is a Good Idea
Cost of funds cheaper than many other unsecured loans: Even though credit cards are normally thought to be very expensive if you are rolling over the balances, surprisingly for business requirements, they can often provide funds at a far cheaper cost than for many other types of unsecured debt.
The APR of business credit cards typically ranges from 12%-24% that is quite high when compared to bank loans that range from 4%-15%.
However, it proves to be very attractive in comparison to lines of credit for small businesses and private lenders that range from 30%-50%, invoice financing that can go up to as much as 60% or merchant advances that may be even double that.
Detractors of credit cards may point out that usually, credit card issuers charge steep rates on cash advances, foreign exchange transactions, and even for balance transfers, however, with a little bit of prudent financial planning, these charges can usually be avoided. However, it is always wise not to rely on credit cards for long-term funding as the rate of interest may see dramatic swings.
Zero percent APR promotional offers:
Since the credit card industry is extremely competitive, it is common for card issuers to try to lure cardholders to transfer their dues on competing cards with zero percent APRs for periods that may be as long as 18 months.
These offers can be extremely profitable for e-commerce entrepreneurs as they save a lot on the interest outgo. The money so saved can be deployed into the business.
You get to benefit more if you can get a waiver on the balance transfer fees as you don’t need to pay a single penny on the entire transaction. In case, you are not able to get a zero percent balance transfer, you can still save substantially on the interest expense by consolidating your credit card debt with the help of a specialized debt management company like nationaldebtrelief.com.
Loyalty program: It is very common for credit card companies to offer bonuses on signing up and also have a loyalty program that gives reward points based on the amounts that you swipe on the card.
Many cards also offer cash back as special promotions applicable on spends between two specified dates; the cash-back could be in the range of one to five percent of the amount charged on the card during the promotional period. Reward points are also offered on ongoing card spends which can accumulate and be redeemed for rewards or even cash.
Good Reasons Not to Use Credit Cards for Business Purposes
Dues can accumulate fast: If you use your card for business expenses, you need to be careful about making the payments every month because once the introductory promotional offer ends, revolving balances will attract very high APRs, which together with the penalties charged on not making payments or paying late can make the balance zoom.
It can prove to be very difficult for the entire debt to be repaid quickly and in the meantime, the business will be bleeding.
Cost of capital can be very high with penalties:
Even though credit card debt represents one of the cheapest ways of accessing funds that do not have to be backed by collateral, all calculations can go out of the window if you regularly miss making the monthly payments on time. Not only will you be slapped on a hefty penalty for missing the payment but also you could be charged a penal APR that could be easily around 30%.
If the cash flow of your e-commerce business is not stable and you have doubts that you may not be able to make the monthly minimum payments, it is better that you look around for alternate sources of funding as credit cards will prove to be very expensive.
Future borrowing capacity may be restricted: Credit card approvals are done on the basis of hard credit checks by the issuer so a new card automatically makes your credit score dip. Further, if you start using your card, the credit utilization ratio will also increase and have a further negative impact on your credit score. A dipping credit score, as well as the dues, will serve to make further access to loans more difficult.
Keeping balances to the minimum and making payments on time will serve to boost your score. According to https://www.inc.com, making regular payments on the business credit card will serve to boost your business credit score that will demonstrate to lenders that you are a serious entrepreneur.
Chance of being misused: Typically, when you apply for a business credit card, there will be some other employees or founders who will also be authorized to use the card for business expenses. You not only need to have an unambiguous written policy about the proper usage of the card but also need to keep tabs on the monthly statement to ensure that the card is being used only for approved expenses.
Employee misuse and identity theft can be big concerns for busy e-commerce entrepreneurs so you will need to be extra vigilant.
Given the problem that owners of e-commerce startups face regarding business funding from conventional sources, using credit cards can be a smart solution. You can make the card work harder by taking advantage of promotional offers and reward points; however, you need to be extra careful in making the payments on time and staying alert to opportunities for fraud.
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.