One of the most prevalent challenges faced by a business is the shortage of necessary funds. Financial institutions might not sanction you a loan due to poor credit history or lack of sufficient business tenure. In situations like those, you may want to consider a credit card to fund your business.
Using credit cards to acquire business capital has its own perks. If you are responsible with your finances, manage your debts well and own a business having future potentials, you can easily utilise the card to finance your business adequately.
Why credit cards?
There are a number of situations when you can consider credit cards for funding. You may not have decent credit score or business assets if you just started your business venture. That can reduce your chances of qualifying for a business loan. But you can access the capital without a lengthy application and approval process if you own a credit card.
Here are some advantages of using credit cards to finance your enterprise.
- No need of collateral – Credit cards do not require any security against the fund. This allows young business owners who do not have any such asset to enjoy short-term financing.
- Grace period – Financial institutions offer a grace period of around 45 days to pay off credit cards bills. This period is interest-free and interests will levy only when you fail to clear the dues within the deadline.
- Spending limits – Credit cards come with a pre-determined limit. This controls your monthly expenditures and helps you save more money.
- Expenses are easy to track – You can easily keep track of all your expenses if you follow your credit card bills. It can help you monitor your monthly and annual costs, as well as detect any fraud transaction from your account. You can also plan the budget precisely.
- Improved credit score – You can easily improve your CIBIL score if you are responsible with your finances. Financial institutions consider you creditworthy when you repay all your dues in time without defaulting on the credit. Higher CIBIL score will provide you more flexibility while applying for loans in the future.
Along with the advantages, there are some drawbacks that you should also consider. Keep in mind these potential cons –
- Liability – Your credit score will take a hit if you default or delay on payments. Also, you must know how to use a credit card in a sensible manner to avoid falling into debts.
- Credit utilisation ratio – You will be considered credit hungry if you use more than 30% of your card utilisation ratio on a regular basis. It will also affect your CIBIL score adversely.
- Less capital – Business loans generally offer more capital compared to a credit card. You might not get enough funds to cater to your big expenses. Also, when a loan gets sanctioned, the entire amount is disbursed to your account altogether. While this is ideal for huge expenditures, credit cards are appropriate for short-term financial needs in business.
Keeping the above points in consideration can help you better utilize the credit cards for your business. Make sure to approach the right financial institution to enjoy all the benefits.