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Supporting Teachers: Inspiring Students
Flexing the Plastic to Finance the Business
Consumers are used to buying everything using credit cards. Now research suggests that small businesses too use
credit cards as their main source of finance.
dozens of suppliers (and all the paperwork that
entails) when you can get free 30 days of credit from
Visa or Mastercard?
Often, small businesses find it hard to obtain trade
credit too.
Moreover, unlike bank statements, which tend to
offer only a partial description of the transactions
made, credit card statements list everything that
has been bought in full.
This makes it easier for owners and managers of
Small businesses are flexing their credit cards to finance SME’s to quickly assess what the money is being
spent on.
day-to-day expenses such as buying raw materials.
The missing link
Open any Business Studies textbook and you will
soon come to the section on “sources of finance”.
After reading for a few minutes you realise that there
is a wide range of sources available for businesses both small and large.
But one kind of finance is often missing – even
though recent research suggests that it is the most
common financing tool used by small and mediumsized businesses (“SME’s”). What is this tool? The
humble credit card.
Research into finance
In the most comprehensive study of financing for
SME’s ever undertaken in the UK, Warwick Business
School discovered that businesses spend more
than £1.8 billion on their “plastic” every month.
The research found that 55% of SME’s used credit
cards, while 53% had bank overdrafts and only 24%
used bank loans. Only 3% of the sample of 2,500
companies used equity finance as their main source
of finance.
Credit card statements not only help reduce
paperwork but are also a handy way of keeping track
of fraud and inappropriate use of company money.
Asset finance
Credit cards are great for financing day-to-day
expenses, but they are not always appropriate.
Credit cards are also used by SME’s as very much a
short term source of finance. 95% of companies
surveyed pay off their credit card bills in full each
month (compared with 79% of consumer cards).
However, only 12% of the study’s respondents said
they used credit cards to finance the purchase of
fixed assets such as equipment and vehicles.
Fixed assets are best financed through longer-term
sources of finance, such as bank loans (if the assets
are to be bought outright) or through leasing or hire
purchase.
Sources of Finance
The main sources of finance for small businesses are:
Credit cards
Why is the use of credit cards so popular?
Convenience seems to be the main reason. Most
credit card spending is for day-to-day bills, such as
travel expenses and raw materials.
Bank overdrafts
Quite simply, credit cards are one of the simplest
ways to pay for goods and services. Why go to the
bother of setting up a trade creditor account with
Government grants
Asset leasing
Bank loans
Shares (“equity”)
Sources: Financial Times; Warwick Business School
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