Credit cards integral to small business financing
By Jeremy M. Simon | Published: June 29, 2007
Small business owners who need some quick cash, but are unsure where to borrow from, should consider using a credit card. Alongside other choices, like personally investing in the business and getting a loan, business credit cards represent a viable option for small businesses in need of some funds.
For small business owners, personal investment can often be the cheapest route to some quick cash. Such an investment can be accounted for as a loan to the business or an equity investment.
Loans of this type allow the business to pay back the principal plus interest, with the business owner essentially lending to their business and personally receiving the interest income. Meanwhile, the business is able to expense any interest.
However, the danger in this approach is that small business owners can end up draining their cash fund entirely.
Separately, borrowing funds from a third party is a popular choice when buying business assets. Established businesses may choose operating notes or lines of credit.
Lines of credit are best suited to situations where bills need to be paid ASAP but payments from customers will not be received for a short time period. Designed to cover short-term gaps between earnings and expenditures, lines of credit often charge higher interest rates than traditional-term loans.
Therefore, when assets are being purchased, term loans may be the better option. Still, the interest that business owners pay on either type of loan will be a tax-deductible business expense.
Finally, a business credit card offers an excellent option provided the cardholder is able to pay off the balance and avoid steep interest charges. Business credit cards that provide cash back or air miles can be used to cut future business costs.
Business owners who borrow on plastic should strive to use their business credit card for monthly expenses, paying off their balance in full before the statement due date. The cost involved with borrowing on any credit card comes when high balances get revolved from month to month.
Deciding what choice is best for a small business involves figuring out the cost of borrowing and how it will impact the business. Small business owners need to decide whether the benefits of using the borrowed funds outweigh the expenses, whether they invest personally, secure a line of credit or term loan from a third party or use a business credit cards.
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