When everything comes together and your small business is in the midst of growth, everything seems to be looking up. But sometimes even your business cloud nine needs to be propped up by a small business loan.
But as always, small business owners have to stay grounded in the day-to-day operation of their business, and expenditures to fuel and sustain growth are a hard reality. Many times, getting the financing to start their small business is challenge enough for many owners, let alone securing the funds for their growth. In such times, many may take the strategy of using credit cards – widely available and promoted – to cover their costs.
However, this carries many risks owners should be aware of, because unless your business is incorporated and you are personally removed, maxing out credit cards has many pitfalls:
- Damage to personal credit score: Credit utilization rate is one of the most important factors that determines a credit score as measured by major reporting bureaus. It determines about 30 percent of your score. So when an owner needs to max out cards because of operational expenses, credit utilization rate is wildly skewed and can lead to negative impacts on credit score.
- Triggering of penalties: Maxing a card is risky because if a single payment on a maxed card is defaulted on as a result of reaching the limit, the credit card issuer is able to kick in the penalty rate. This penalty rate could raise your interest rate to its highest possible level under the terms of the agreement, usually 30 percent.
- Poor financial habits: While it may prove useful in the moment, relying on credit cards to cover expenses forms bad spending habits in small business owners. Racking up bills and statements can dig a deep hole of debt, further increasing the risk of default and perpetually falling behind. A high credit utilization rate may also reflect poorly in the view of traditional lenders.
Where working capital can help
In the case of small business owners who do not know where to turn for financing, alternative lending options stand above others. For instance, working capital loans are designed to help business owners run operations on a day-to-day basis while demanding minimal commitment and allowing for far greater flexibility in cash flow and repayment terms.