Need financing to buy inventory or fixed assets, or to help your business get through a shortfall of cash? 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.
Today, we’ll look at how you can use a corporate credit card to finance your small business’ needs.
Using a personal or corporate credit card in a small business
Financial institutions in Canada extend credit to small businesses and their owners in the form of credit cards. Credit cards offer the convenience of a line of credit — the credit is there when you need it, and it’s also handy for separating personal purchases from business purchases.
Be aware of the personal and corporate credit card terms — business credit cards have higher interest rates. If your business fails, you as the owner are likely responsible for full repayment of any outstanding credit card balances. Yikes!
Know your credit score
Let’s say you have a personal credit card with an unused credit limit of $30,000. If you visit the bank for a business loan, you may be surprised to learn that that unused credit of $30,000 will be considered debt that you’ve already incurred. This will increase your debt to equity ratio — used by banks to determine the current proportion of debt you have to the equity you hold.
Why does that happen with credit cards? Their rationale is: although you haven’t used that $30,000 available credit, you could.
Always be on top of your credit rating. Make sure to cancel credit cards you don’t need anymore, which will reduce the revolving credit debt that the banks see when they review your credit history. A better credit rating means better interest rates and loan terms.
Contact Equifax Canada or TransUnion Canada to get instant access to your personal credit score. Check your report closely. Look for credit cards you may have cancelled but which still show up on your credit report, and which are affecting your debt to equity ratio. Look for errors in your report — loans you don’t have, employers you no longer work for, etc.
It’s your responsibility to check your credit report annually. Do this well before you need a loan, corporate credit card, or mortgage. Notify the credit company of any errors so your credit score will be as high as it can be when you meet with your banker.