How Dependence on Credit Cards Stifles Growth

According to the British Business Bank’s Nations and Regions Tracker 2024, 17% of SMEs rely on business credit cards. Their widespread use is driven by high public awareness, a low rejection rate, and their convenience for covering day-to-day expenses and managing cash flow.

However, as a business grows and its financial needs become more complex, the costs of using credit cards to manage cash flow can begin to outweigh the benefits. In certain circumstances, unpaid credit card debt can quickly escalate and hinder growth.

Research also suggests a gap in understanding of funding beyond credit cards. One in five SMEs report that they don’t know where to find information about lending or lenders. Even when businesses do seek other funding, 58% only consider one lender, potentially missing out on more suitable or affordable options.

To help, we’ve compiled the signs that it’s time to consider financing options beyond a company credit card, and what those alternatives might be. 

You need to spend more than your credit card limit

As businesses grow, their expenses naturally increase. While your credit limit may rise alongside your revenue and credit score, there will eventually be a point where it can go no higher. For example, UK high street banks Lloyds and the Cooperative currently have a £25k limit on the business credit cards they advertise on their websites. If you need to make a purchase of large machinery or fund a major marketing campaign, your credit card may not offer enough credit to cover those costs.

What’s the alternative? 

A revolving line of credit might offer a higher limit than a credit card and, like a credit card, can be accessed, repaid, and borrowed from again. For one-off purchases, a term loan could help. If the purchase is of machinery, asset finance could be more cost-effective than a loan, as it would be secured against the machinery.

You aren’t able to pay off your credit card debt in full every month

One of the biggest drawbacks of business credit cards is the high interest rates and fees on balances that aren’t paid off in full each month. For example, at the time of writing, the annual percentage rate (APR) on a business credit card at HSBC is 22% (variable), and at Barclays it ranges from 26% and 55% (variable). If you carry a balance over an extended period, these interest charges can quickly add up, making it an expensive financing option.

What’s the alternative?

Spending more than you earn cannot be sustainable, so reaching out to a financial expert for advice is crucial. But if you have existing credit card debt that is increasing due to fees and interest, taking out a term loan to repay it could reduce the amount of interest and fees you’re accumulating, making repayments more manageable and cost-effective.

You’re expecting a dip in income that will last more than a month

If your business anticipates a period of lower revenue, there’s a risk of accumulating a balance on your credit card, leading to the high charges mentioned earlier. If you can predict when these dips in income are likely, you could choose to put in place a funding product that covers your expenses during this period more affordably.

What’s the alternative?

A term loan could help if the dip is a one-off, while a revolving line of credit provides ongoing access to funds that can be repaid and borrowed again when needed, without the need to go through a new application process. If the drop in income comes from completed work with long payment terms, selective invoice finance could also bring in cash earlier to fill the gap.

You want more predictable and manageable debt repayments

With a credit card, no matter how much you spend, you’re required to repay the debt in full within 30-60 days. However, you may want to make smaller repayments spread over a longer time frame, and avoid high interest rates. 

What’s the alternative?

A term loan could offer a more predictable repayment structure that better suits your needs.

Finding what’s right for your business

Credit cards can be an excellent funding option for smaller, day-to-day business expenses that can be repaid quickly. However, when it comes to financing larger projects that will drive business growth, other funding options are available that are specifically designed for this purpose. These options can provide the capital you need along with a repayment structure that makes it more affordable.

It’s true that other finance options besides credit cards and overdrafts can be more complex to understand and negotiate. This is why many businesses choose to work with brokers like Risecap.

At Risecap, we take the time to understand your business and offer bespoke business finance solutions that remove barriers to growth. With care and attention at the heart of what we do, we want you to feel confident and supported during every step of your funding journey.