Credit card finance is one of the most popular mediums through which you can finance your food truck business. You get discounts on gas or food supplies, enjoy fraud protection in case your purchases don’t match what you ordered, and even get roadside assistance when your vehicle breaks down.
Nonetheless is it an option you can comfortably rely on to finance your business? Are there risks you should be wary about — risks that could put your business in a bad situation or worse situation than it is in? The simple answer to this is “Yes”, there are considerable risks with relying on credit cards as the sole method of financing your business.
The Risks of Credit Card Financing For Food Trucks
Credit cards are fine to use for normal, everyday business expenses if you know you will be able to pay it off at the end of the month. But relying on credit cards to finance things like equipment upgrades, payroll, or making risky investments can put you at high risk.
Here are three risks of financing your food truck business with a credit card:
1. You Accrue More Cost
It’s no news that credit card issuers charge you interest on the loans you take. However, the lower your credit score is, the higher your interest gets and the more stringent your repayment terms are. If you have a credit score under 580, which is considered bad, then you have a lot to worry about when it comes to credit card financing.
The massive interest charged on loans means purchasing a new truck or supplies for your food becomes more expensive than it ordinarily is.
2. You May Overspend
When you have a credit score of 750 or above, your options for financing are enticingly extensive. You could apply to any issuer, or even multiple issuers, and get approved for a credit card with great repayment terms and perks in no time.
Credit card issuers also make it very easy to spend from your credit limit, and with a good score, your balance can get as high as $50,000. The risk here is that when you don’t exercise self-control — when you max out your credit limit on each card you get, you may take out loans you can’t repay.
What’s more, using up your credit limit without paying it back increases your credit utilization ratio (CUR). You should know that a high CUR has direct negative effects on your credit score, and having a decreasing credit score doesn’t spell out well with your other needs for financing.
3. Penalties for Carrying Balances
When you don’t make your loan repayment for the month in full, you don’t just accrue penalty charges and a damaged credit score. You also carry your balance into the next month, and this attracts even higher interest rate charges — charges that could exceed over 20% of your loan. Attracting penalties and balance transfer charges then makes your purchases even more expensive than they already were and puts you in a stressful situation. How stressful can the situation get?
Well, you stand as a guarantor for every loan you take and if you constantly fail to repay these loans, you put yourself or your business at risk of bankruptcy.
The Alternative to Credit Card Financing
As a small business owner looking for that extra funding, credit card finance could still be the perfect option for you. However, with the risks involved, you can find yourself in a bit of trouble.
To avoid this, you may then consider alternative methods of financing through our partners. Contact us to learn more about how you can upgrade your food truck business without spending more than you can afford.