Do you need financing to help your business get through a shortfall of cash, or purchase inventory or fixed assets? Debt financing is one option.
Debt financing is money loaned to you or your business, usually by a commercial bank or credit union, for which the lender has a right to earn interest.
Here’s one example of debt financing: using a corporate credit card as a financing solution in your small business.
Pros and cons of corporate credit cards as small business financing
One pro of using a corporate credit card as small business financing is that they offer the convenience of a line of credit. The credit is there when you need it, and it allows you to keep personal and business purchases separate from each other.
However, there’s a downside too. Business credit cards have higher interest rates. And if your business fails, you’ll most likely be the one responsible for full repayment of any outstanding credit card balance. So make sure you read and understand the terms fully before you commit.
A note about credit limits
How do credit limits factor into small business financing? Here’s an example. You have a personal credit card with an unused credit limit of $20,000, and you want to get a business loan from the bank. However, you might discover that this unused credit will be considered debt that you’ve already incurred. This will increase your debt to equity ratio, which banks use to figure out the current proportion of debt you have compared to your equity. Their logic here is that you haven’t used that $20,000 of available credit, but there’s the potential that you could.
The importance of credit rating
As with anything credit card-related, it’s important to be aware and stay on top of things, particularly your credit rating. Make sure to cancel credit cards you don’t need anymore, to reduce the revolving credit debt that the banks see when they review your credit history. A better credit rating means better interest rates and better loan terms. Win-win!
Check out Equifax Canada or TransUnion Canada to find out your personal credit score. Review this report with a fine-toothed comb, keeping an eye out for credit cards you may have cancelled but which still show up on your credit report (these affect your debt to equity ratio). Errors may exist too, including loans you don’t have, employers you no longer work for, information that isn’t yours, and more.
Check your credit report annually, and well in advance of applying for a loan, corporate credit card, or mortgage. Notify the credit company of any mistakes so enough time will elapse for the correction to be made. This way, your credit score will be as good as it can be when you meet with the bank.