In many ways, your business and personal finances are very different. What might be considered prudent or thrifty in your household budget may be stifling for your business. Unlike in your household finances, it takes money to make money when you run a business. If you’re not prepared to invest in your SME’s infrastructure, you might find that your growth is stymied and your offering is lacking when compared to your competitors.
That said, there are some instances where the same tenets of good financial sense apply to both your household and your company. And that’s when using credit cards. In both contexts, a credit card can be a useful tool that allows you to make capital investments without sacrificing your liquidity. In both business and home use it may be tempting to make the minimum payments on your credit card. But this also comes with some serious caveats.
Here we’ll look at everything you need to know about credit card minimum payments.
What is a minimum payment?
The minimum payment on your credit card is the smallest amount of the outstanding money that you are allowed to pay back each month. The amount you pay back depends on the card’s annual interest rate and the amount outstanding, as well as any fees or charges applicable.
Why you should try to pay more than your minimum payment
Like many other business owners, you’re cognizant of cash flow. You’re aware that you need to keep your overheads as low as possible while doing all that you can to boost revenues. With this in mind, you may be forgiven for thinking that minimum payments are a good idea. However, as with your personal credit cards, making only the minimum payment will prolong the debt and increase the amount that you spend on interest.
This means that your credit card debt will continue to put a squeeze on your profit margins for years to come, and your hard-won revenues will be spent paying off more interest than you should be paying.
The debt can loom over you for years or even decades, hampering your profitability. For instance, if you were to spend £5000 on a card with an APR of 16%, you’d pay over £3,000 in interest and it would take over 16 years to repay the debt.
If your business is experiencing lean times, you may want to set your repayments to the bare minimum as a temporary measure. But when business is good, you should increase your monthly repayments by as much as you are able in order to reduce the amount you spend on interest.
What if you can’t afford more than the minimum payment?
When your cash flow is tight, you may baulk at the prospect of paying more than the bare minimum. New SMEs often find it difficult to manage their finances. They’re paying off their start-up costs, and gradually building a customer base. As such, their revenue is limited, and their outgoings are high.
The good news is that you can box cleverly with your business credit cards just like with your personal cards. You can switch to a new balance transfer card with more attractive introductory rates. You can typically transfer between 90 and 95 percent of your balance to a new card.
What if you can’t afford to make your minimum payment?
If you are unable to make your minimum payment, don’t fall into the trap of burying your head in the sand. Reach out to your lender as soon as possible. They may be able to implement a solution that makes it easier to manage your repayments.
We can help
If you’re interested in finding out more about minimum payments and managing credit cards, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.