Securing funds is vital for many growing businesses for many reasons; SMEs with adequate funds or capital can meet their needs, make wise investments, and adapt well to shifting market conditions.
Money.co.uk business credit card experts have investigated the latest statistics surrounding business funds and looked into the best ways to secure them.
How can SMEs secure extra funding?
Unlocking new funding can open doors to business growth. There are many options for SMEs to secure capital, and making the right choice will allow a small business to thrive.
According to the 2024 Small Business Finance Markets Report, the use of external finance by small businesses saw a consistent rise in 2023, growing from 41% in Q1 to 50% in Q3, with greater reliance on business credit cards. Their use is up from 12% of SMEs in Q1 to 20% in Q3!
The table below shows some ways your small business could secure extra funding:
|
Method |
Description |
|
Business credit cards |
Flexible funding allows businesses to borrow up to a set limit, paying interest only on the outstanding balance. |
|
Bank loans |
Traditional loans from banks or credit unions offer large sums but often require collateral and a strong credit history. |
|
Venture capital |
Funding from firms that invest in high-growth startups in exchange for equity; ideal for scalable businesses. |
|
Crowdfunding |
Raising small amounts from many individuals via platforms like Kickstarter or GoFundMe, allowing pre-sales and brand visibility. |
|
Grants |
Non-repayable funds from government or private organisations are often targeted at specific industries, demographics, or social goals. |
|
Personal savings or loans from family and friends |
Often a first step for early-stage entrepreneurs, with informal terms but potential relationship risks. |
Business credit cards offer companies quick access to short-term funding, helping to manage cash flow gaps and cover expenses before revenue arrives. They enable businesses to build credit, benefit from rewards and perks, track expenses, and control employee spending. With features like grace periods and the ability to separate business from personal expenses, these cards provide flexibility and an emergency financial buffer, supporting financial stability and growth.
How do business credit cards differ from personal credit cards?
While both business and personal credit cards provide financial flexibility, a business credit card is specifically designed to meet the unique needs of companies—offering perks like higher credit limits, tailored expense tracking, and rewards for business-related spending, while also building the credit profile of the business itself. In contrast, a personal credit card is geared toward individual consumer habits and affects only the cardholder’s personal credit score.
What are the cons of using a personal credit card instead of a business credit card?
According to a 2023 study, more than 50% of businesses in the UK used a personal credit card and not a business credit card to aid cash flow management.
Using a personal credit card for business expenses might seem convenient, but it can come with several downsides for a business. Joe Phelan, money.co.uk business credit card expert, explains the key concerns with using a personal credit card for business expenses:
1. Difficulty in separating personal and business finances
Mixing personal and business expenses can make it challenging to track and manage finances, especially during tax time. It can complicate accounting processes and may lead to errors in expense categorisation.
2. Tax issues
Combining personal and business expenses might make it harder to substantiate business deductions during a tax audit. Poor recordkeeping can result in missed deductions or penalties.
3. Limited business features
Personal credit cards often lack business-specific benefits such as detailed expense tracking, spending categories, or employee card options. They may not offer rewards tailored to common business expenses (e.g., office supplies, travel, or advertising).
4. Impact on personal credit
Using your personal card for large business expenses can blur the lines between your personal and business finances. This could lead to overusing the card and potentially missing payments. This, in turn, could negatively affect your personal credit score, limiting your access to future credit and financial products for both personal and business needs.
5. Legal and liability risks
In some situations, mingling personal and business finances can blur the lines of liability, potentially exposing your personal assets if the business faces legal action.
6. Lack of professionalism
Using a personal credit card might signal a lack of financial planning or professionalism, especially when dealing with vendors or partners. It can be harder to establish business credit, which is crucial for securing loans or other forms of financing.
7. Lower spending limits
Personal credit cards often have lower spending limits compared to business credit cards, which could restrict your ability to manage larger business expenses.
8. Missed opportunities for building business credit
Using a business credit card helps establish and build the business’s credit profile, which is important for long-term growth. Without a business credit history, future financing opportunities might be limited.
How to successfully build business credit
Joe Phelan, money.co.uk business credit card expert, explains why building business credit could be the way forward for your business, and gives his top tips on securing it:
Strong business credit demonstrates that your company is reliable and capable of managing its financial obligations, which can lead to lower interest rates, higher credit limits, and better payment terms, giving your business the flexibility and resources it needs to grow.”
Here are some expert tips to help you build strong business credit:
1. Establish your business
Set up a formal business structure like an LLC or corporation. Sole proprietors can still build credit, but forming a separate legal entity adds credibility and establishes separation between personal and business finances.
2. Open a business bank account
Use this account for all business transactions to establish a clear financial record. Banks, creditors, and credit bureaus look favourably upon businesses with dedicated accounts.
3. Get an Employer Identification Number (EIN)
Apply for an EIN from the IRS, even if you don’t have employees. This unique number helps establish your business as a separate entity, and it’s often required by banks and lenders when opening accounts or applying for credit.
4. Register with business credit bureaus
Obtain a D-U-N-S (Data Universal Numbering System) number from Dun & Bradstreet (D&B), one of the leading business credit bureaus. This number acts as your business’s unique identifier with D&B.
Report to other bureaus: Pay attention to other bureaus, such as Experian Business and Equifax Business. Some lenders automatically report, but for those that don’t, proactively ensure your payment history gets reported.
5. Establish trade lines with vendors and suppliers
Identify vendors or suppliers who offer credit terms and report payments to business credit bureaus. Common examples include office supply companies, wholesale suppliers, and even certain utility companies.
Paying early (or at least on time) is crucial. A history of on-time payments builds a positive credit profile and can lead to better terms and limits from suppliers.
6. Open a business credit card
Look for a business credit card that reports to business credit bureaus. Use it responsibly, keeping balances low relative to your limit.
Using a credit card strategically and paying off balances each month demonstrates your ability to handle credit and builds a positive credit history.
7. Maintain low credit utilisation
Just like with personal credit, aim to keep your credit utilisation — the ratio of credit used to your total credit limit — below 30%. This will show that you’re not overly reliant on credit and demonstrates responsible usage, which can positively impact your creditworthiness.
8. Avoid too many credit inquiries
Each credit application can result in a hard inquiry, which might lower your score slightly.
9. Diversify your credit mix
Besides credit cards, consider adding a business loan or line of credit if necessary. Diversifying your credit mix can enhance your credit profile and provide greater flexibility, but only take on additional credit if it aligns with your business needs and financial goals.
10. Separate business and personal credit
Avoid using personal credit to fund business expenses, as this keeps finances separate and reinforces your business’s credit profile.