We love explaining the benefits of accounts receivable financing, and how it is an effective tool for all sizes of business, but there are other tools worth considering. Another way to help start-up businesses in their infancy is the use of a credit card. A recent ‘how-to’ guide in the online edition of the Wall Street Journal, discussed how to pick a credit card for your business.
When a line of credit from the bank is not yet forthcoming, and those first few invoices are not yet large enough for you to qualify for invoice factoring, a credit card may be the answer as a stopgap measure. This also establishes initial credit in the business’s name.
The guide offers some sound advice when it comes to considering which type of credit card would work the best for your company. The major questions being:
- What are the spending habits of your company?
- Will you pay charges each month or pay off the card?
It is important to assess the annual percentage rate being offered by the credit card company. If you plan to only pay a small amount off each month, those fees can soon add up. However, if your credit is good, you may have been offered a low interest rate, sometimes even 0% for a period of time. Fixed rates can also be helpful if interest rates are rising.
If you are planning to pay off the full amount on the card each month, you may want to consider credit cards that offer rewards, or offer a longer period of time in which to pay. Reward programs, such as air miles, or hotel points can be great for companies with employees who need to travel for their work. Some cards offer cash back options, but the guide suggests paying attention to the fine print, as the higher payment reward may only be attached to certain purchases.
The guide also points out that it is sometimes worth paying an annual fee if the particular credit card benefit works for your company. These are also often the cards that may offer a longer payment grace period, of up to 30 days instead of 20. Also, if you are planning on carrying a balance, a card with an annual fee, but lower monthly rate, may be more cost effective. There are several sites that offer credit card comparisons and advice to help you choose.
Whether you are planning on utilizing a credit card for a short period of time until you qualify for a bank loan or can start using another form of financing such as invoice factoring, or if you are planning on using credit cards as an ongoing credit tool, it is worth really researching the right type of card. Once you have started to grow, and are generating healthy accounts receivable, invoice factoring offers deep advance rates against those eligible receivables, which means more cash flow for your business than a traditional loan. Factoring can be customized to your specific business, and also offers many other benefits.
