With interest rates rising, and the cost of overdrafts and loans increasing, business cards can be a great way to pay for everyday expenses and manage cashflow.
With interest rates rising again recently, and now at 5% when they sat at barely 0.1% just over a year ago, many businesses are facing higher borrowing costs for credit and loans.*
The knock-on effect is that it can be harder for businesses to obtain loans too: the number contracted 5.2% on an annualised basis in the first three months of 2023, data shows.
Keeping agile so firms can manage cashflow during these tougher economic periods is important, and it may be that there are better approaches to borrowing.
Getting an overdraft or credit card
There are many ways to get short term finance to help with cashflow which can be overwhelming, especially for smaller businesses where employees may be juggling several roles and responsibilities. Finance options include loans, credit cards and invoice financing, but one of the most popular is setting up an overdraft.
You don’t have to use the full agreed amount, and so it can be quite flexible if you don’t know exactly how much you will need, and there’s no set repayment amount each month.
Once you start using it though, you’ll usually pay interest and/or fees until the money is repaid. These fees and rates do tend to vary depending on the provider, but be aware you might be charged fees even if you don’t use the overdraft at all.
Another issue is that it if you have the type of business with many payments going in and out, it can be very difficult to work out the exact total cost to your business of using the overdraft.
Also the bank may reserve the right to call in your overdraft at short notice, meaning you have to find the cash quickly to pay it off.
Overdrafts are also not an especially cheap way to borrow money any more. For example, a Barclays business overdraft has representative equivalent annual interest rates of between 14-18%. You can get an idea for what you may need to pay on its calculator.
Then there is the option of a business credit card. These can provide easy access to cash, but the issue is with rising interest rates, the APRs of these may continue to increase, and as result you could end up paying far more for purchases than you envisaged.
Using a business charge card for cashflow flexibility
You might already use a business overdraft, loan or credit card to help with cashflow, but it may well be that a charge card is a better bet.
Usually with a charge card you get interest free credit for a certain period after the purchase. This is a simple way to pay for items or for expenses on jobs, especially if you then invoice a customer for them, as you aren’t paying interest on the cost yourself as you might with other forms of finance.
Then, if an invoice is paid (ensuring your terms match, or are shorter than, the interest-free period) you simply pay off the balance within the agreed time limit without incurring any extra borrowing costs.
With the extra time afforded, and the requirement to pay the balance off within a certain period to avoid any charges, they’re a great way to get into good cashflow habits, rather than building up debt that eventually needs servicing.
With an Allstar business card for example, you may be able to access interest free credit for up to 44 days on business purchases**. At a time when interest rates are climbing, access to interest free credit could have a hugely positive impact on your business, and cashflow.
Also, business cards such as Allstar Plus can be far more convenient, in that you can control how and where your employees spend the company’s cash to ensure you have no cashflow surprises when expense claims come in later.
Conclusion: work out what suits you
Ultimately, every business is different and their financial needs vary too. So it is up to each to assess what credit lines they need, and plan accordingly. If you need access to funds over a longer term, then perhaps a loan would suit. But if agility, control and cashflow are important, then a business card could be the smart option.
*Nothing in this article is intended as financial advice. Businesses should ensure they are fully aware of the benefits and challenges of these varied financial services and make their own decision on which option is most suited to them and their needs.
**Subject to status and a full credit check. To be eligible for Allstar Plus, your company must be incorporated (e.g. a limited company).
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