By Clive Lewis, Head of Enterprise, The Institute of Chartered Accountants in England and Wales
When running Small and Medium-sized Enterprises (SMEs) making purchases with credit cards is often a convenient and flexible option to fund expenses. Providing the debt is controlled, it can be a good way to finance day-to-day outgoings and convenient for making expenses over the internet or by phone. Credit cards are widely accepted around the world and with a variety of company or corporate payment cards on the market it is easy to find one best suited to your business.
With difficult economic conditions and constrained access to finance, many SMEs opt for forms of finance that offer quick and easy access to cash. Besides being secure, credit cards offer flexibility and can help businesses to monitor and control expenditure, allowing a revolving balance that can be paid off over a period of time.
Business owners who use credit cards typically have an interest-free period of up to 56 days before they have to settle the bill, which can help with the company’s cash flow. It can also help to cut administration. With a company credit card you pay one bill each month, no matter how many transactions you make. Itemised monthly statements help with administration and accounting.
Using a credit card means business owners do not have to carry large amounts of cash or a company chequebook and can keep close track of expenditure. Giving credit cards to employees also allows owners to effectively manage and monitor staff purchases and set individual limits.
Making purchases using a credit card also offers protection if any items are faulty. If you purchase a faulty item on a credit card, under the Consumer Credit Act 1974, the credit card company is liable along with the trader for any breaches of contract or misrepresentations. The goods must have cost more than £100 and no more than £30,000.
For start-up businesses especially, using a credit card can also help build a credit record which could help them to secure better rates on other forms on finance, such as bank loans or overdrafts. Most lenders are reluctant to lend to businesses if there is no payment history in settling bills.
Evidently, there are certain drawbacks associated with using credit cards, particularly if the business owners are not disciplined with their expenditure and spend beyond their means. If the minimum payment is not paid at the end of the month, interest charges can mount up quickly and if the agreed credit limit is exceeded, an over-the-limit fee may apply. This could have an adverse effect on their credit rating.
Allowing employees to have use of the credit card also poses a risk. While it is possible set individual limits, there is still the potential for staff to spend company money unchecked. If employees misuse the credit card, the business will be liable for settling the bills even if the good or services bought are not relevant to their organisation.
Personal credit cards can also be relatively easy to obtain and convenient to use to finance a business. With an array of cheap deals offering introductory interest-free credit periods, it can be tempting to use them as a supplementary form of finance. However, if an SME is a limited company, there is a significant risk that the individual card holder, rather than the business, will be held personally liable for any debts incurred.
In addition, despite appealing initial rates of interest, it does not make financial sense to use a personal credit card to regularly fund a business. In the long term credit card rates are generally higher than for other forms of business borrowing and it is easy to accumulate business debt on personal credit cards.
Using a personal credit card to fund business purchases can also make it difficult to monitor and keep personal and business expenses separate. Hence, it would be preferable to acquire a business payment card, bank loan or overdraft which will offer better interest rates and be matched to the business’ requirements.
A charge card is a type of credit card that requires the balance to be paid in full at the end of each billing cycle instead of making payments on the balance over several months. Some charge cards do not have a credit limit, giving a limitless amount of credit, whereas credit cards do have a limit and banks will apply penalties if this limit is exceeded.
Typically, a business requires excellent credit to obtain a charge card whereas credit cards are available for a variety of credit histories. Transactions with a charge card are also more limited than with a credit card. With a charge card you cannot transfer balances or make cash advances on a charge card.
Since it is not possible to carry a balance beyond the grace period, there will not be any interest on a charge card balance. However, a late fee will be payable if the full balance is not paid by the due date — this could be a flat fee or a percentage of your balance. On the other hand, the interest rate on a credit card dictates how much is charged for carrying a balance and can be avoided by paying the balance in full before the grace period ends.
Ultimately, it is important that you choose the right card for your business. Interest rates, charges, interest-free periods and benefits can vary a great deal and it is advisable to shop around and negotiate to ensure you get the right card to help finance your business.
Credit cards are not for everybody
In deciding whether to grant you a credit or debit card, providers will use a variety of sources to see if you meet their requirements. Each card company has different criteria so if one does not prove satisfactory try another provider, although it is a mistake to try too many as this can damage your credit rating.
Card companies use the information on your application form to assess your application. This is supplemented by information from the credit reference agencies who use a variety of sources to give you a credit score. These include data from the electoral roll for how frequently you have moved and legal actions against people living at the address, court records for any past debt problems as well as checking what other lenders have searched your records to see what credit you might already have. Apart from credit reference agencies, banks building societies and utility company records (gas, electricity, etc) can be accessed to assess your ability to manage your finances.
A bad credit history may not exclude using credit or debit cards but it may be that you need to trade as a business for 18 months to 2 years to establish a trading history and a credit track record before applying for a card.
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