Credit card or business loan: which one is better? | BDC.ca
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What you should know about using a credit card for business expenses

Personal credit cards can be an option when starting a business, but you will soon want to find alternatives.

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Many entrepreneurs use a personal credit card to pay for business expenses when they’re starting their company. But is a personal credit card the best option for a growing business?

While there are some advantages to using a credit card in the early stages of setting up your company, there are also serious drawbacks. The option of getting a business loan is often a much better choice.

“There are some risks with using your personal credit card for your business,” says Lisa Christensen, Manager of BDC’s Entrepreneurship Centre in Calgary. “You could be jeopardizing your personal credit and your personal buying power.”

On the plus side, a credit card may be the only credit you can access when starting your business, and they’re relatively easy and fast to get.

As well, you’re typically not charged interest on credit card charges if you pay off the full balance on time each month. You can even build up extra reward points on your card.

However, Christensen, who leads a team that lends to entrepreneurs, cautions there are many downsides to using a personal credit card to finance your company.

  • Higher interest rates

    Personal credit cards generally charge much higher annual interest rates on balances carried month to month than the interest charged on a business loan.

    Those interest charges can become a serious issue for your business if the balance owed keeps growing on your card.

  • It can hurt your personal credit

    You have a personal credit score that’s based on a series of factors, including the number of credit inquiries, your repayment history and how much of your total available credit is being used.

    “When you’re using your personal credit card for business purposes, you’re increasing the utilization of your overall credit and that can negatively impact your credit score,” Christensen says. “That can put your personal credit at risk, especially if the business runs into hard times, and you make some late payments.”

  • It can reduce your personal buying power

    If you’re using a large percentage of your personal credit for business expenses, you may limit your available credit for personal needs.

    Your credit score has an impact on your ability to get a mortgage, car loan and other credit for your personal use. Any negative impacts from using your personal credit cards for your business can therefore reduce your personal buying power.

Why a business loan is a good alternative

Loans are designed to meet the needs of a growing business

Every business is unique and a loan’s terms and conditions can be tailored to meet your company’s specific needs.

For example, you may want to postpone repayment of the loan’s principal for a period of time until you start seeing the benefits of the money you’ve borrowed. Or you might negotiate a seasonal repayment schedule that fits with the ups and downs of your cash flow over the course of the year. You may even qualify for principal payment holidays to support you during high growth or challenging periods.

Protects your cash flow

A term loan will help you space repayment over the useful life of the asset you’re purchasing or the project you’re taking on.

You can match the term of your loan to the duration of what you intend to use the money for, allowing you to spread your payments out and preserve your cash flow.

“For example, let’s say you’re expanding into a new market,” Christensen says. “You need financing for sales and marketing expenses and to hire additional staff. The benefit from this growth could be over four to five years. Taking out a term loan will help you match the repayment to the period you’re getting a benefit from the investment.”

Separates your business and personal finances

Every entrepreneur should aim to separate their business and personal finances. It not only facilitates accounting and tax preparation but also helps protect your personal credit.

A business loan allows you to do this, and it will also help build your company’s credit history with a lender.

“A bank is going to get to know you and see you are good for your repayment. So that’s important for something a growing business really needs to consider.”

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