You’re an SME who is looking for business financing. You don’t have access to collateral to get a business loan so, you’re thinking of just using your business credit card to cover your cash needs. As a credit specialist, CreditEnable recommends you apply for an Unsecured Business Loan instead of relying on your credit card in this scenario.
What are the benefits of using my business credit card?
- As no collateral is required, credit cards are easier to get compared to business loans.
- Your credit card offers you revolving credit. If you simply pay the minimum amount required every month, you have continuous access to the remaining credit.
- You get rewards and other perks like cash backs when you pay with your credit card.
- Credit cards help build your business credit.
- All your payments are in one place, making it easier to track your expenses.
- You can use them for working capital, ongoing expenses, and cash emergencies.
But credit cards also have some cons that may outweigh the pros. Let’s talk about them.
Why shouldn’t I rely on credit card debt to grow my business?
1. A high balance on your credit card negatively impacts your credit score
Your credit utilization ratio plays an important role in determining your credit score. Your credit utilization ratio is the amount of credit you have used out of all the credit available to you. The total credit you can spend on all your credit cards is combined to determine the total credit limit available to you.
If you have a high dependency on your credit card, that will bring down your credit score. Lenders typically like to see low ratios of 30% or less. A low utilization ratio tells a lender you can manage your credit well.
A high utilization ratio results in a low credit score, which makes it harder for you to get a business loan in the future. This may increase your reliance on your credit card to finance your business growth or compel you to accept a business loan at terms and an ROI that may not be beneficial for your business.
2. You can borrow larger amounts when you get a business loan
Credit cards are mostly good to use for daily expenses, working capital, or emergency expenses. If you need a large amount of money to purchase machinery or pay your employees, you are better off getting a business loan. This is because lenders offer different types of business loans for different purposes. A Machinery Loan has different ROIs and loan terms compared to a Working Capital Loan. These loans are designed to meet the specific needs of SME businesses. If the total credit available to you on your credit cards is on the lower side, you may not be able to make that machinery purchase or pay all your employees their salaries on time.
3. Credit card interest rates may be higher than business loan ROIs
When you’re repaying any type of debt, whether it is a business loan or credit card debt, you have to pay the principal amount you borrowed and the interest you agreed upon with the lender. In India, the interest rate on credit cards is classified as a “Finance Charge” and may also be known as the Annual Percentage Rate (APR). The average credit card interest rate offered by a lender in India in 2021 is 41%. Some lenders may even communicate the APR as a monthly percentage by dividing the APR by 12 to make it seem like a lower rate.
That interest rate is high when you compare it to business loan interest rates, which can either be fixed at a certain amount throughout your loan duration or reduce as you pay off the borrowed amount. These are called fixed interest rates and reducing interest rates. Learn more about them here.
Since the duration and terms of a business loan are fixed, you know exactly how much you will owe a lender over a certain period. Lenders try to be as transparent as possible when it comes to the terms of business loans since they consider the money they are lending to you an investment in your business. So, they are usually willing to work with you to ensure that you can pay the instalments as scheduled.
Why should I get a business loan to grow my business?
- You get access to a large lump sum amount upfront when you get a business loan to fund big purchases that will help you grow.
- Business loans keep your credit utilization ratio low.
- Repaying business loan instalments on time improves your credit score and inspires confidence in other lenders who may be willing to lend to you in the future on preferable terms.
CreditEnable has made the business loan process simple, quick, and 100% digital! We work with our SME customers to find the right business loan that matches their business needs and goals. There are different types of business loans an SME can get based on your sector, needs, business size, and collateral available. Depending on the loan size and your credit history, some lenders also offer Unsecured Business Loans that don’t require any collateral. Learn more about them here.
On the other hand, credit card providers may not be able to customize interest rates based on the customer’s financial situation or needs. So, businesses that rely on credit card debt may find themselves owing a lot more money over time than what they had originally accounted for.
If you’re ready to apply for a business loan, let us help you! Get started today!