Business credit card alternatives: What are my options?

For many business owners, alternative funding options might be more cost-effective in the long run when compared to business credit cards.

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Business credit card alternatives: What are my options?

It might seem like the obvious choice to get a business credit card, but for many businesses, it might not be the best option. That could be because of a poor credit score or simply because credit card payments can easily get out of hand, especially when you or your staff use these cards for ad hoc expenses. There are, of course, some good alternatives to access credit facilities, which we will discuss in this article.

Revolving credit facilities

A revolving credit facility is a great alternative to a business credit card. You can borrow the required money when you need it, pay it back, and if you need to you can borrow more. This can continue for the agreed term of the revolving credit facility, which gives business owners more flexibility when considering much to borrow and pay back each month. Contained within the payment terms, a lender will specify how quickly you need to make repayments after withdrawing funds.

An example of a revolving credit facility

Juniper Ltd takes out a new revolving credit facility capped at £10,000. Straight away, they withdraw £3,000 to cover an outstanding supplier invoice. With the remaining £7,000, they plan to purchase a new machine and will repay the £10k plus interest over the following six months. After the six-month agreed repayment period, they will have access to the full £10k again to spend as they choose.

It’s worth highlighting that you don’t have to use the maximum amount available and you’ll only pay interest on the amount that you use.

Benefits of a revolving credit facility

  • Readily available cash flow

  • No need to apply for a new loan each time you need cash

  • Less interest repayable when compared to a credit card

  • Lower interest rates

  • Easy and flexible repayments

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Unsecured loans 

For businesses that don’t have a demonstrable trading history or who operate in an asset-light industry, an unsecured loan might be attractive. The main reason is that you don’t require collateral or a security deposit. In place of putting up assets, borrowers will be eligible based on their credit score and sales.

In times of uncertainty, businesses might prefer not to offer security, or if a company is growing fast and needs business finance quickly.

With a host of different lenders on the market able to offer unsecured loans up to £250,000, this presents an opportunity for businesses that have bad credit and still need a source of funding. 

Benefits of an unsecured loan

  • Less risky borrowing option because there’s no danger of losing any assets

  • More flexibility than secured loans

  • Qualifying criteria for unsecured business loans are less stringent

  • Larger loan amounts can be applied for

  • Since the lender does not require extensive documentation, a small unsecured business loan takes less time to get

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Merchant cash advance

Businesses that have decided against a business credit card might discover a new form of funding: merchant cash advance. This is a novel source of funding based on the monthly average card customer receipts received through card payment terminals. A business owner will need to pay back the advance plus a fixed fee using an agreed percentage of daily credit/debit card taking, until repayments are made in full. This is an ideal situation if you are looking to expand your business, need to renovate or buy stock for your business, and are finding it hard to raise the capital required. 

Merchant cash advances are well suited to SMEs that need urgent capital to cover everything from cash flow gaps to unforeseen purchase opportunities. Bear in mind that this type of financing can force a borrower to pay representative APR (all charges in addition to the interest rate) that can be in the triple digits. APR can be either fixed or APR variable. So what’s the difference between fixed APR and variable APR? A fixed APR generally doesn’t change over the life of the merchant cash advance. This may make budgeting easier, because the rate’s more predictable.

Benefits of a merchant cash advance

  • Quick decision from lenders

  • Suitable for businesses with no demonstrable trading history

  • Flexible terms and amounts

  • Easier cash flow management

  • Competitive interest rates

Get a merchant cash advance

Invoice finance

Another alternative to business credit cards is invoice financing. Lenders make it possible for you to get paid faster for completed work, advancing you most of the value immediately. If your business has a lot of different customers, it might be suited to invoice financing.

As one of the best ways to manage cash flow shortfalls and clear accounts receivable quicker, invoice financing is a proven way to ensure your business can navigate turbulent market conditions, and react to unexpected opportunities.

Benefits of invoice finance

Invoice finance carries both pros and cons. Some of the advantages include:

  • The main advantage of invoice discounting, as it's sometimes referred to, is that you have more control over accounts receivable and can raise cash quickly for your business

  • Compared to other types of funding, invoice financing has a quick turnaround

  • As invoice financing is an unsecured business loan you won’t have to offer up any fixed assets from the company

  • Invoice discounting can help reduce debtor days, which means small businesses can realise growth opportunities and prevent cash flow shortages 

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Another alternative to using a business credit card is a business overdraft, which can give you access to additional spending power without the need for a loan. This is effectively a line of credit on your business bank account and interest will only be charged on the overdrawn amount. You have some flexibility as to when you choose to pay back a business overdraft to reflect your cash flow situation. Although your bank can demand repayment as and when it chooses and may charge a fee from the overdraft facility

You can increase or reduce your overdraft limit as long as your credit score remains healthy and your history of making repayments is not called into question.

Benefits of an overdraft

  • Rates of approval are higher than other lending facilities

  • The approvals process is straightforward 

  • Can pay off debts when cash flow is positive

Get business overdraft

Company credit cards might seem like the easiest way to pay for business expenses, but in many cases, they might not suit. Here are a few reasons why not: 

Credit cards are a short-term solution

Charge cards are handy for day-to-day operating expenses, however, if you need to make a big ticket purchase it may not the right funding option for your business.

Let’s say you need to buy some office supplies or book business travel, these kinds of expenses are perfectly suited to credit cards, but capital expenditure like new machinery or bulk purchases is better suited to a business loan.

Spending larger amounts on a business credit card ties up your revolving credit load (which may damage your credit score) and means higher interest costs.

In addition, most high-value purchases require time before realising a return on investment. Thus, a 6-month to 5-year term loan can spread out the impact on your bottom line when compared to a credit card that has to be paid off every month. 

Costs are high and sometimes unpredictable

Most business owners will be aware that credit cards carry higher interest rates than alternative business loans. That’s not all you have to worry about though, as you will need to consider changing interest rates and fees for late payments. The amount of interest you need to pay on the card balance can fluctuate depending on the prime rate. If the interest rates go up, your payments will increase too, which makes it harder to manage payment outflows.

What is a credit line?

A credit line is another business credit card alternative, becoming widely used in the UK, as a source of short-term funding. They work in a similar way to credit cards in that you have a credit limit and you need to make an agreed minimum payment each month. The difference between the two is in place of a physical card, you withdraw the cash directly into your bank account. Interest is only paid on the drawn-down amount, rather than on the agreed credit limit.

Steps involved in taking out a new credit product

  • Do some research

  • Get a quote

  • Make an application

  • Application is approved or declined

  • Sign a contract

  • Use the funds 

  • Make repayments in line with your contract

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Joe Morley
Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

Alternatives to a Business Credit Card

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