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How Small Businesses Can Use Credit Cards for Funding

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Even though credit cards have higher interest rates and annual fees, they’re commonly used to bankroll businesses, particularly small ones. Just like with any loan, there are risks associated with using your credit card for business funding. But if you act responsibly and take advantage of rewards, it can be a viable way to get your business up and running or keep it humming along.

 

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What is credit card funding?

Credit card funding is when a small business owner uses a credit card to pay for business expenses. Credit card funding gives the business owner access to a source of money that can be used to purchase equipment, spend on marketing or pay for a host of other business expenses.

The interest rates on credit cards tend to be higher than what banks charge for a business loan, but since the Great Recession of 2008 and 2009, banks have been reticent to lend to small businesses. That’s forced small business owners to find alternative funding sources, and credit cards are one of them. At last count, 65% of small businesses in America regularly used credit cards.  

Credit card funding isn’t only used for startup expenses. A business can use credit cards to purchase inventory, cover rent or pay for marketing expenses. Some business owners prefer this way of funding, while others choose it after getting turned down for a small business loan. “Credit cards offer quick and easy access to funding, particularly if you are able to pay it off,” said Brooklyn Lowery, a credit card expert at CardRatings.com. “It can even out cash flow if you have inconsistent revenue streams.”

What is required for a business to set up credit card funding?

Credit cards are a viable funding option for small businesses in part because they are easier to obtain than business loans. Decisions are made quickly, giving you speedy access to credit. Business credit card issuers expect a minimum credit score of around 670, but there is a handful that will accept scores lower than that. The higher your credit score, the lower the interest rate and the more you can borrow. The lower the credit score, the higher the interest rate and the lower amount you can borrow. [Read related article: How to Apply for a Business Credit Card if You Have Bad Credit.]

It’s important to think about how you’ll use the business credit card when shopping for one. Many come with cash back and reward points on certain purchases, as well as 0% introductory interest rate, signup bonuses, and other perks. If you use a rewards business credit card strategically you can save serious cash on business expenses.

For example, let’s say you spend a lot of time in your car for work. You’ll want a credit card that offers the best rewards at the gas pump. Or, if your office goes through a lot of supplies each month, a credit card that gives you a high cash back percentage on office supplies may be more advantageous. The idea is to rack up as much cashback reward as you can in a month, being careful not to overspend and to pay off the balance monthly. If you carry a balance, the interest will cancel out the rewards.

How can business credit cards be used to set up other bank accounts?

Credit card funding isn’t reserved only for the costs associated with your business. It can be used to open other bank accounts.

Some business bank accounts have a minimum balance requirement. If you don’t have the cash on hand, some banks will allow you to use a credit card to meet the minimum deposit. Check with your bank to determine if your credit card company considers credit card funding a cash advance. The interest rate on cash advances is typically higher than for a credit card transaction.  

Should you use credit card funding for your business?

Whether or not credit card funding makes sense for your business depends on your cash flow, business situation and the amount of money you need to borrow. In some instances, it can benefit your business, but in others, it could be the beginning of your business’s demise.

When does it makes sense to use credit card funding?

Here are four situations where it can make sense to use credit card funding:

  1. You have uneven cash flow. A credit card can fill any gaps while you await payments from your customers. “With credit cards, if you know you have money coming in the middle of the month and you have expenses at the beginning of the month, you can handle those expenses,” said Lowery. “That’s a huge pro of using credit cards.”
  2. You need a funding reserve. Credit card funding also makes sense if you want to use it for emergencies, to purchase new equipment or to chase a growth opportunity. “Many small businesses have a credit card for additional liquidity, to cover inventory, equipment and marketing,” said Ken Alozie, managing director at Greenwood Capital Advisors and a SCORE mentor. “Ideally you aren’t using it to fund the entire business.”
  3. You don’t need too much cash. Credit card issuers aren’t going to give you an unlimited line of credit. They are going to cap it, typically around $50,000. If you need more than that, you’ll have to apply for multiple credit cards or consider alternative funding. But if you need less than $50,000 and can’t get approved for a bank loan, a credit card is a viable option.
  4. Your business will benefit from the rewards. Business credit card issuers are vying for your business and will throw generous rewards your way to get your business. As long as you pay off your balance each month, those cash back percentages and reward points can make your money stretch a little further. [Ready to shop for a credit card? Check out our guide to choosing the best business credit card]

When you should rethink credit card funding?

Credit card funding is a quick and easy way to access capital for your business, but it doesn’t make sense for every business. Here are three instances when credit card funding isn’t your best option:

  1. You carry a balance or can’t pay back what you owe. If you’re unable to repay your balance in full, the fees and interest you’ll incur can create a debt trap that can be extremely difficult to get out of.”Interest rates on credit cards are incredibly high, much higher than a traditional loan with a bank,” said Lowery. “If it’s not for something you can pay off right away a credit card is not the right thing for you.”Business credit card APRs range from a low of 14.21% to a high of 22.16%, which is quite a bit higher than Small Business Administration loans that have APRs ranging from 7.75% to 10.25%.
  1. You need more money. Business credit cards have lower lending limits than loans. If you need more than $50,000, a business credit card may not be a viable funding option. Also, if you’re using credit card funding for payroll or to keep the lights on you may want to consider other options since you don’t want to accrue debt that you can’t pay back.
  2. You don’t have collateral. Business owners may be required to put up a guarantee which could include a home, vehicle or real estate property.”If things fall apart and your business fails, your business isn’t on the hook for the credit card, you are,” said Lowery. “That changes as a business gets bigger but not for most small businesses.”

What are the alternatives to credit card funding?

If credit cards don’t make sense for you, there are several other funding sources. Here’s a look at five popular options:

  1. Business loans. Offered by banks, credit unions and online lenders, small business loans are term loans that have either a fixed or variable interest rate. Loans can have terms of as short as six months to as long as five years. The interest you pay depends on your credit score and your business’s finances.
  1. Venture capital: If you’re operating in a high growth industry and are doubling – if not tripling – your revenue, you could raise venture capital. With this form of funding, venture capitalists invest in your business in exchange for a minority stake in the company. Technology draws the lion’s share of VC interest, but other high growth industries can raise venture capital dollars.
  1. Crowdfunding: Crowdfunding platforms enable individuals to invest in a startup business in exchange for merchandise or a piece of the business. Crowdfunding is a great way to raise a small amount of capital or test out a business idea or product. Be mindful of the fees and rules of the platforms; some won’t let you access any money unless you raise the total amount of your campaign goal.
  1. Invoice factoring: With invoice factoring, you sell your invoices to a factoring company and get immediate access to cash. You don’t have to wait days, weeks, or months to get paid, but it does come at a cost. Factoring companies charge either a variable or fixed rate, depending on the industry you’re in.
  1. Merchant cash advance: A merchant cash advance is a loan that you repay through your with a percentage of future credit card and debit card sales or via daily or weekly fixed payments.

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A Look Back At Housing 2020: Rental Housing Gets Riskier

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According to the American Housing Survey cited in a recent article, there are about 48 million rental housing units in the United States ranging from single-family homes to large multifamily apartment complexes. Of those 48 million units about 23 million are owned by individuals, according to a recent Rental Housing Finance Survey; that’s more than half of the occupied units in the country. Yet private rental housing providers have been under relentless attack in recent years increasing risks and costs. This has worsened in 2020 as I have pointed out. More risk means fewer housing units and higher prices, not a good outlook for the future.

Any business based on renting assets is based on risk. Think about the last time you went bowling. When you rent the shoes, the person behind the counter often will hold a driver’s license? Why? It’s a way of offsetting the risk that you’ll go home with the shoes either on purpose or accidentally. Nobody wants to deal with a lost driver’s license. Offsetting this risk has absolutely nothing to do with you or your trustworthiness; it is uniformly applied and routine.

Housing providers have to similarly offset the risk of allowing a stranger occupy their private property. There are several ways of doing this, including using credit checks. But lately, politicians are beginning to eliminate the credit check from the tools that housing providers can use to offset risk. Minneapolis for example has eliminated credit checks arguing that they are a “barrier” to housing.

Is race a factor in bad credit and thus a barrier to people of color to get housing? The fact is, yes, African American people have more credit issues. But would eliminating credit checks help them? The answer is, “No.”

An article in the Washington Post, “Credit scores are supposed to be race-neutral. That’s impossible,” is emblematic of how this issue plays among the public and policy makers. The author says two contradictory things. First,

“This would lead one to think that credit-score calculations can’t be biased. But factors that are included or excluded in the algorithms used to create a credit score can have the same effect as lending decisions made by prejudiced White loan officers.”

Then she writes,

“One quick way to impact your credit history is a court-ordered judgment. And Black borrowers are more likely to fare badly when taken to court by their creditors. Debt-collection lawsuits that end in default judgments also disproportionately go against Blacks, according to a 2020 Pew Charitable Trusts report.”

Logically, the right way to state this is that credit measures are biased against people who have default judgments against them, and African Americans have higher rates of defaults. Then the next question would be, “Why?” The most obvious answer is the right one, poverty is disproportionately concentrated among people of color.

But eliminating credit checks for housing won’t help that problem. If a housing provider is unable to evaluate risk based on past financial performance her only option will be to raise rents and deposit amounts in case there is a problem; that extra cash would provide a buffer if a resident stops paying rent. This won’t help anyone with less money. What’s the response to that? Ban rent increases by imposing rent control! That’s a bad idea too and won’t help either.

The answer is to figure out how people who have less money and therefore have more issues making ends meet can solve that problem and improve their credit scores. The author of the Washington Post article makes a sensible suggestion: include steady rent payments in credit scores. Some housing providers do, and it’s a great idea. But it is a positive one that actually helps the family; banning quantitative measures of past financial performance doesn’t.

The danger that unfolded in 2020 is that justifiable outrage about racism could lead to interventions that don’t address poverty and it’s negative consequences like default judgments but elimination of accepted measures of those consequences. Eliminating the evidence of poverty – struggling to pay bills – doesn’t help pay the bills! At best, these kinds of measures sweep the problem under the rug ensuring higher rents and making housing a risky business only big corporations will be able to do.

The answer is to address the broader underlying issues of poverty and increasing housing production. When there is more supply of housing providers compete with providers for residents and will be forced to bargain with potential residents, even those with dings or dents or completely destroyed credit. Housing abundance solves a housing problem while eliminating measure of risk only makes that risk higher and actually creates a housing problem.

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Can My Cosigner Take My Car?

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Cosigners don’t get any rights to the vehicle they signed the loan for. However, if the cosigner is trying to take your car, it may be time to take some action.

Cosigners and Ownership

Can My Cosigner Take My Car?Cosigners can’t take the vehicle they cosigned for because their name isn’t listed on the title. A cosigner isn’t responsible for making the monthly payments, maintaining car insurance, or really anything else. Cosigners simply lend you their good credit score to help you get approved for the auto loan, and if you can’t make payments, the lender can require them to pick up the slack.

Since you’re the primary borrower on the vehicle and your name is listed on the car’s title, you have ownership rights. Your cosigner can’t come to your residence and take possession of the vehicle – even if they’re the one making the car payments right now.

If you do default on the loan and the vehicle is repossessed, the cosigner still can’t take the car.

But My Cosigner Did Take My Car!

If your cosigner did somehow take your keys and your vehicle without permission, it’s considered theft. If you want to take action, you can report the car as stolen.

However, a better first step is probably contacting the cosigner and letting them know that they don’t have any ownership rights (if you want to maintain a relationship with them). You can ask them to return the vehicle and explain that their name isn’t on the title.

Removing a Cosigner From a Car Loan

If things are dicey with your cosigner, then it may be time to consider removing them from the auto loan. The easiest way to remove a cosigner is by refinancing.

Refinancing is when you replace your current loan with another one. You can work with your current lender or another one, but most borrowers look for another lender to refinance with.

You don’t need a perfect credit score to refinance your car loan – it just has to be good or better than it was when you first got the loan. Another common requirement of refinancing is that you’ve had the loan for at least one year.

Other common requirements for refinancing are:

  • You’ve stayed current on payments throughout the loan
  • You have equity or your loan balance is equal to the vehicle’s value
  • Your car has less than 100,000 miles and is less than 10 years old

Most borrowers usually refinance to lower their loan payments. Since you’re replacing your current auto loan with another one, many borrowers try to qualify for lower interest rates or extend their loan to lower their payments. If your credit score has improved, you may even be able to get a better interest rate and remove your cosigner!

Can’t Refinance to Remove the Cosigner?

Refinancing isn’t in the cards for everyone. However, another efficient way to remove a cosigner is by selling the car. Cosigners don’t have to be present at the sale of the vehicle, since they don’t have to sign the title to transfer ownership.

If you sell the car and get an offer large enough to cover the entire balance of your loan, you and the cosigner can walk away from the auto loan scot-free.

However, many borrowers need cosigners because their credit score isn’t the best. If you want to sell your vehicle to remove your cosigner, but you’re worried you can’t get a car loan by yourself, consider a subprime auto loan for your next vehicle.

Bad Credit Auto Loans

Since many traditional car lenders don’t work with borrowers who have poor credit histories or lower credit scores, they often ask them to bring a cosigner. But what if you don’t want a cosigner (or can’t get one) on your next auto loan? Enter subprime car loans.

Subprime lenders are teamed up with special finance dealerships, and they operate remotely. When you apply for financing with a special finance dealer, you work with the special finance manager who acts as the middleman between you and the lender.

You need documents to prove you’re ready to take on an auto loan – typical things like check stubs, proof of residency, valid driver’s license, a down payment, and other assorted items depending on your credit situation. If you qualify, the lender determines what your maximum car payment can be, and you choose a vehicle you qualify for from there.

What sets subprime auto loans apart from traditional car loans is that they assist borrowers in tough credit situations and offer the opportunity for credit repair. Some in-house financing dealerships that don’t check credit reports don’t report their auto loans, which means your timely payments don’t improve your credit score.

Finding a Car Dealership Near You

The best way to improve your credit score is by paying all your bills on time. Payment history is the most influential piece of the credit score pie. There are many lenders willing to work with bad credit borrowers, you just have to know where to look!

Here at Auto Credit Express, we’ve already done the searching, and we’ve created a nationwide network of dealers that are signed up with subprime lenders. Get matched to a dealership in your area, with no cost and no obligation, by filling out our car loan request form.

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United Way hoping to raise thousands of dollars on Giving Tuesday –

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“We have partnered with Carter Meyers Associates in the community and developed what we call Driving Lives Forward, an automobile loan program to help families that maybe have no credit or bad credit to access resources to have an affordable loan to purchase a reliable used car,” said Barbara Hutchinson, the Vice President of Community Impact for the United Way of Greater Charlottesville.

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