Credit cards are a worthy weapon in the capital management arsenal of any small-business owner. They offer fast, easy access to capital, and there is no need to complete an application every time use of them becomes necessary. But, if not used with prudence, balances can creep upward, and the interest rates charged by credit card issuers can be a substantial drain on a business’s cash flow.
The fact that interest rates on small-business loans are currently quite low has many business owners asking whether or not it might be a good idea to take out a loan in order to pay off their higher-interest business credit card debt. So, is refinancing business credit card debt a smart idea?
Lower Interest Can Boost Your Bottom Line
That much is obvious. If a small-business owner owes $10,000 in credit card debt and is paying 14% interest, paying off those credit cards with the proceeds of a business loan taken out at 4% interest would save them about $100 per month. That’s not an inconsequential amount of cash for most small-business owners. But there are other things to consider.
The monthly payments on a loan may be higher than the amount of money eaten up by credit card payments, as loans are not revolving, and must be paid off in a relatively short period of time. When considering taking out a loan, business owners must not commit to terms they cannot realistically meet, regardless of their desire to get out of credit card debt. A business loan might be a quicker path to lower debts, but cash flow must be considered, too.
Businesses with good credit ratings may qualify for unsecured credit cards, but a business loan may require the security of collateral or a personal guarantee. Of course, most business credit cards require a personal guarantee these days, too. But if taking out a business loan to pay off credit card debt will mean turning unsecured debt into secured debt, that could have considerable repercussions, should the business be unable to fulfill the terms of the lending agreement.
Considering Other Options
Business owners may not need to complete a business loan application if other options are available. For example, they may find that another business credit card issuer is offering 0% APR on balance transfers for the first year. It goes without saying that the interest rate will rise after the incentive period, but if a year with no interest will be enough time for the business to pay off the credit card debt, then the introductory offer would be a better deal than the business loan.