India has a thriving market for small and medium scale enterprises. It is one of the fastest-growing business hubs in South-Eastern Asia, with over 42.50 million SMEs that produce more than 6000 different types of products. These organisations contribute to almost 6.11% of the country’s GDP, employing about 106 million people, which is 40% of the nation’s workforce. The manufacturing sector has seen a steady 10% growth over the last few years and is expected to achieve a 7.80% hike in this fiscal year alone.
However, despite the substantial growth record and number of people working in these sectors, SMEs and MSMEs across the country suffer from a continuous lack of capital. Although they account for nearly 95% of the total industrial units in India, they work on a meagre fixed asset of approximately Rs. 1,47,912 Crore, and are responsible for only 16% of all lending from various financial institutions.
To address these shortcomings, lenders offer several types of loan options for small and medium scale businesses. Along with business loans that offer a sum of money to an organisation, today’s entrepreneurs also have the option to use a business credit card that offer a revolving line of credit to companies.
What is a credit card for business?
These feature-rich credit cards are designed to offer more features and convenience for business expenditures, like cashback against bulk purchases, bonuses against meeting certain spending targets, etc. Certain credit cards also offer discounts on airfare and hotel bookings, as well as complementary services like airport lounge access for business travellers.
Experts suggest using a credit card for business if the enterprise requires a revolving line of credit to maintain their working capital and operational expenses. It also helps separate one’s personal and professional line of credit, and assist during taxation of the same.
Running a business with the help of a business credit card
Credit cards for businesses allow convenient and easy access to a line of credit for purchasing goods and services, and to withdraw cash. Similar to personal credit cards, these cards also carry an interest charge against the money utilised, however, unlike a business loan, these offer faster access to funds for short-term requirements and can boost a company’s purchasing power significantly.
There are several advantages of using these type of credit cards. Here are some of them.
Building business credit –
A credit card is one of the easiest ways to build an organisation’s credit score. It is monitored by CRISIL, a separate body overseeing credit history of organisations. If an organisation repays its debt within the due date and do not exceed the pre-allocated line of credit, CRISIL will consider them creditworthy and will allocate them a higher credit rating. It will help the business secure finances in future for long-term expenses.
Credit cards also act as a permanent financial backing as account receivable whenever necessary. Most organisations do not enjoy a steady stream of revenue throughout the year; credit card for businesses can provide the much needed monetary backing to boost the working capital during the slower season.
Separating finances –
It is important for a business entity to separate their personal and professional finances as it helps with their accounting and taxations and offers protection of their personal assets in case of a financial downturn. Business credit cards are ideal for this purpose as they offer a revolving line of credit, which is useful for small and medium scale business.
Moreover, most financial institutions also offer online record-management tools to small and medium scale industries that opt for credit cards for businesses. In addition to the monthly statements, these can prove essential to monitor and organise expenses. It also eliminates chances of debt accumulation and increases profit margin as the organisation better tracks the inflow and outflow of finances.
Reward programs –
Business credit cards often offer attractive reward programs like travel rewards, cashbacks, discounts, etc. It can help an organisation to lower its expenses over necessary goods and even utilise loyalty programs like reward points to gain extra benefits.
There are several financial institutions that offer these types of credit cards to eligible applicants. NBFCs like Bajaj Finserv even provide cards that act as a standard credit card, a loan card, EMI card, and cash card as one. That makes Bajaj Finserv RBL Bank SuperCard one of the most preferred credit cards available in the Indian financial market. Its simple application process, online credit card status monitoring feature and multiple bill payment methods make it convenient and preferred amongst many self-employed professionals.
Things to remember while using a credit card for business
A credit card for business can be a convenient way to access instant finances; however, there are certain aspects of using this financial tool that every organisation should carefully manage.
One such important aspect of using a business credit card is creating a stable repayment strategy. Without a good repayment strategy, an organisation might face difficulty repaying the credit card debt and manage their business finances at the same time. It will also help maintain a lower credit utilisation ratio, which will help increase their credit rating in the future.
Businesses should also ensure accountability and carefully decide who receives a card to monitor and control their expenses. It will help avoid unexpected spending and adhere to the credit card’s limit by preventing more than one individual from handling the financial tool. Organisations can also limit the expense to help maintain the limit.
Business credit cards can prove to be an ideal alternative to one time advances for SMEs and MSMEs across India. Their unique features and revolving line of credit makes them suitable for businesses that require immediate financing to maintain their overhead cost and continue their operations.
By Shailendra Kumar
who is an financial consultant and having more than 5 years of experience.