When cash flow becomes tight, many business owners tend to utilise credit cards. Whether to ensure that operational costs like telephone, electricity and water bills are covered or to provide additional funds to the diminishing cash of the business, relying on credit cards may offer more cons than pros.
What Causes the Cash On Hand to Diminish?
In many cases, business owners make use of credit cards to support the business because there is no enough money coming in and the business cannot continue to operate without shelling out some. So where are the business’ funds? Is the business not profitable? It probably is, but the problem is that all its money is with its debtors who are running late most of the time for payments. The invoices are piling and so are the orders. In order to ensure that orders are delivered, suppliers are prioritised until none is left to cover the operation cost.
Why Credit Card Must Not Be Used?
What business owners tend to forget is that credit cards are debt. Utilising such facility means the business has to plan repayments. Credit card may provide easy funding but it can be more costly too. If you make use of credit cards without planning how you will regularly repay it, you are opening yourself and the business to high interest rates and even late payment charges. These additional payments could cripple your cash flow even more.
Another aspect business owners should consider when using credit card to fund the business is that, this is a limited resource. When you have reached your maximum credit line, your alternative source of funds goes with it. And yet, repayments still have to be made.
What Else Could Fund Your Business?
Instead of borrowing money from your credit card, you can go with invoice factoring. With factoring, a percentage of your outstanding invoices are given to you as working capital, usually up to 80% of your turnover. It is like a credit line that is directly tied to your sales.
When your invoices pile, the amount of funding you can access also grows, without relying on fixed assets or your ability to make repayments. When your debtors have paid, the remaining amount from the invoices is given to you. This scheme allows you to have access to additional funds without additional burden, giving you more opportunity to think how to grow the business.