Raising funds is difficult. Should your business rely on credit cards?

By Rishi Mehra

Ever since the nationwide lockdown due to Covid-19 pandemic, businesses across the country have been struggling. With loss of business and uncertainty in the future, businesses are struggling to make ends meet. As liquidity dries up, the need to find sources of finance has become a pressing need for all.

What is even more troubling is the fact that bank loans, the lifeline for small businesses, are now tough to obtain. This is especially true if you run a business that has been hit hard by the pandemic. For example, banks will be very reluctant to lend if you run a restaurant. The retail sector has been the hardest hit and getting a bank loan, if you operate in that segment, will be difficult.

This then takes us to the question – should you rely on your business credit card to keep your business afloat and cover some of your expenses. There is no yes or no answer to this, but depends on a number of things. It can range from the nature of expenses you want to cover, to what the future outlook seems to be for your business. It is important to understand that business credit cards are great for monthly expenses and then subsequently earning rewards on it.

Most credit cards are designed to reward you as you spend, but in a situation where cash flow itself is impacted, you may not be looking for rewards. If you think your situation would be better in about a month or so, a credit card may be a good choice to cover some expenses. However, if there is ambiguity in the future, running additional expenses on your credit card may prove to be unwise. It is important to remember that no card comes with 0% interest rate in India and the minimum interest you can expect is about 1.99% per month, which is 23.88% (APR). There are then products like Bajaj Finserv RBL Bank SuperCard, where you get you get a pre-approved loan limit, which you can convert into an interest-free loan against credit card and get instant cash up to 90 days. Only a flat 2.5% processing fee is charged. However, these products are far and few and getting a new card in itself may not be easy now.

You should not use your credit card to pay fixed costs. If you are running expenses like paying rent for your business with a credit card, it can potentially lead to severe debt issues. Credit card debt, and more of it in a pandemic is the last thing your business needs. In fact, there are no quick fixes and you would need to think long-term. The pandemic severely exposed business vulnerabilities and the high debt model followed by most companies to grow and even run their business.

In the end, credit cards should not be your ideal choice in the current situation. Try a personal loan if you can, although most lenders have tightened restrictions and lending criteria. You can also try a number of debt fintechs who are doing a commendable job currently. They have a accommodative credit model that takes a better nuanced view on the potential of a business. You can also think about branching out into a new line of business and this pandemic a number of businesses has successfully pivoted, albeit temporarily. You can always try friends and family for some funds, but it may sour your relationship if you are unable to repay.


The writer is the CEO, Wishfin.com)

Raising funds is difficult. Should your business rely on credit cards? Raising funds is difficult. Should your business rely on credit cards? Reviewed by TechCO on 8/09/2020 Rating: 5

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