SME Owners Use Personal Credit Cards to Pay Business Costs

  • Anil Kanda
  • 09 Jan, 2014

Around 25% of the UK’s SME owners have used personal finance to fund their businesses, a new study reveals. Of those, almost half said they had used personal credit cards for everyday business costs, potentially paying high rates of interest. Others had dug into savings or even taken out mortgages on their homes to fund their businesses. Some entrepreneurs in this position may not realise that experts can help them to access other sources of funding, including an Ashley business loan, business cash advance or invoice finance. It should also be realised that company credit cards are available, as an alternative to combining your personal and business spending on one card.

Keeping Personal and Business Finances Separate

The study, carried out by Experian , found that SME owners were using personal sources of finance for everything from the initial set-up of their businesses to paying suppliers and investing in updated equipment. Doing this could, however, make the business owners more financially vulnerable and personal credit ratings could be put at risk – so it is a good idea to explore alternative sources of business finance.

In addition, finance experts warn that it is important to keep personal and business finances separate. You should have a separate account for your business, which will be entitled to special interest rates, and also use a company credit card to help keep track of spending. Measures like these will help you to keep your financial affairs in proper order for your accountant, and will also be helpful if your books need to be audited in the future.

Business Credit Card Options

The latest figures from the BDRC Finance Monitor for SME lending showed that use of credit cards among UK-based small businesses has steadily risen over the past year. Where 15% of firms used plastic for their spending in the third quarter of 2012, the figure soared to 20% for the same period in 2013. However, use of bank overdrafts by small businesses saw a fall over the same time period. This suggests that some businesses have changed their means of borrowing in order to take advantage of interest-free credit periods and avoid paying overdraft fees. As noted by, if you are considering taking out a business credit card, you should first compare the options to ensure you find the right deal to suit your company. Some business cards do charge high annual fees and interest rates also vary, so it is worth taking time to study the market before deciding which card to apply for.

You should also look at the criteria before applying, since many of the cards will require a particular income level and there may also be other rules about who qualifies for the deal. Be aware that providers may also check your personal credit rating before making a decision on whether to issue you with their business card.

If you intend to pay your bill in full on a monthly basis, then the interest rate charged is not a major factor for you, and you should instead look at the annual fee. However, if you plan to spread your payments, then the APR is all-important, and it is preferable to select a card offering a lower rate. In this situation, cards with a long initial interest-free period and balance transfer offers are also worth considering. In addition to their headline rates, some business cards do offer a range of benefits, including cashback or reward points and travel insurance.

Using Business Credit Cards Wisely

There are various advantages to using business credit cards, as long as spending by this method is properly managed. One plus for plastic is that it gives you an easy means of paying for goods that your business needs. When buying from companies based overseas, in particular, using your business credit card will give you extra safeguards and avoid the complications involved in international money transfers. However, most card providers do charge fees on foreign transactions, so you need to check the details of this.

Another advantage is that having a business card can also enable your staff to buy essential items without all the paperwork and bureaucracy involved in filing expenses claims. It is often possible to have additional cardholders on a business account and you can also set individual spending limits for them as required. This will help to make your senior staff feel that they are trusted and appreciated, although it is obviously important to monitor all spending on company cards closely. If you pay your bill off fully every month, the credit card will provide a source of free or cheap credit, depending on the level of annual fee charged. It will also help to enhance your company’s credit rating when you come to apply for other sources of finance.

Borrowing from Other Sources 

Despite the various advantages of business credit cards, they should not be seen as the main source of finance for small companies – and they are definitely not a good option for long-term lending. If you pay money off over a longer period, then the relatively high interest rates can quickly turn this into an expensive option.

There has been a warning from the Forum for Private Business that banks need to do more to help small businesses source vital funding, rather than leaving them to use credit card borrowing. At the same time, the British Bankers Association has voiced concern over a fall in the number of SME loan applications winning approval, but has also said that, with rates at their current historically low levels, now is a good time to apply for finance.

If your cash flow is causing worries or you need to borrow to invest in your company’s future, then Ashley can help. You can look at various funding options, including business loans, which are available at figures up to £100,000 without penalties for early repayment. Other options are invoice finance, which can help your cash flow, and a Business Cash Advance of up to £100,000. You can use your PDQ terminal to repay this type of advance flexibly.