by Meredith Wood
As any veteran business owner can tell you, sometimes in business stuff just happens. Equipment breaks. Customers don’t pay on time. Or maybe the business is booming and has the expense of expansion. Whatever the scenario, money is necessity, and if a company is unable to cover these expenses out of pocket, they’re faced with the decision of taking out a loan.
But some may wonder, is a small business loan always the right answer? Not necessarily. Sometimes, in fact, opening a small business credit card could be just the solution an entrepreneur needs to finance their business. Here are three situations in which a credit card may be the right financing choice for your business.
1. When you need funding fast
Let’s say you're in the T-shirt design business and you just received a large, unexpected order that requires more T-shirts than you currently have on hand. If you want to fulfill the order, you're going to need extra cash—and fast.
You could go through your local bank for a small business loan—but since it takes anywhere from several weeks to months to get approved, it’s likely you won’t get the money you need in time to complete your order.
Getting a business credit card is an incredibly quick process. If you need the funding fast, a credit card might be the best way to get it done.
2. When you can take advantage of zero percent introductory APR
If you’re interested in opening a business credit card, you may notice a few that are offering a zero percent APR on purchases or, maybe even on both purchases and balance transfers, for an extended period of time.
The zero percent APR introductory offer would be a great financing option if you’re using the card to buy something that won’t increase your immediate cash flow (like replacing broken equipment, for example) and you’d be unable to repay the card’s balance, in full, by the end of the month.
However, it’s important to remember the introductory period won’t last forever, and often the increased interest rate at the end of the introductory period can be extreme. Having zero percent APR can make it too easy to get carried away with overspending, so be careful not to accumulate so much debt that you won’t be able to pay if off before that higher interest rate kicks in.
3. When the credit card’s APR is less than your loan offer
Whenever you’re looking to borrow money, it’s important to weigh the pros and cons of your choices, and one of the best ways to do so is by calculating the APR of each.
Whether you’re looking to get a loan through your local bank, an online lender, or you’re looking to open a business credit card—calculating the APR will help you determine your monthly payments, interest, and other fees, showing you the total cost of borrowing for each of your options. A bank loan will almost certainly be cheaper than a credit card, but if you get an online loan offer, the APR might be higher than your credit cards. If this is a case, it might be better to stick with a credit card to finance your business.
4. When the credit card’s APR is irrelevant
Keep in mind that while it may seem obvious to always choose the lowest cost option, it only makes sense if it meets your business’s needs.
Let’s take the T-shirt designer scenario as an example, and let’s say you’re planning to pay off your debt as soon as you get paid for the large order. If you used a credit card and completely pay off the balance by the end of the month, you won’t be charged any interest. That means the cost of borrowing would effectively be free.
On the other hand, if you went through an online lender for a loan, you may be subject to prepayment penalties, which would void any savings you could have incurred from early payment.
Of course, like any loan option, each business credit card comes with different terms. Some have a spending limit, while others do not (most likely a charge card), and many business credit cards come with rewards. If you do decide to use a credit card to finance your business, make sure the card you choose meets your personal and business needs.
Meredith Wood is the editor-in-chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.