Growing numbers of the UK’s small and medium-sized enterprises (SMEs) are relying on credit cards to absorb bumps in the cash flow road, new research has revealed, with a reliance on plastic steadily increasing in the last few years.

Credit card expenditure among UK entrepreneurs is up by 22% since before the pandemic, according to the inaugural Small Business Index Annual Report from Intuit. That’s higher than in the US (20%) and Canada (18%).

In September last year, the proportion of UK respondents who had used credit cards or loans to support their cash flow was 32%. But in April this year, that was up to 51%, prompting concern about a growing reliance on credit.

Across the three geographical study areas, small businesses’ credit card usage rebounded to pre-pandemic levels throughout the course of 2021 and “has been on a continuous upward trajectory since”.

One owner quoted in the report was on the brink of maxing out six business credit cards, saying: “It keeps you up at night.”

Reducing friction

Antony Smith, Director at comparison site Business Expert, says credit cards can be a useful tool for managing cash flow, especially during periods of irregular revenue, by providing the required capital to cover operational costs.

“They offer a flexible line of credit, which can be particularly helpful for covering unexpected expenses or making strategic investments. Plus, many business credit cards offer reward or cashback incentives that, over time, can provide additional benefits,” Smith says.

Intuit’s Head of Data Communications Simon Worsfold says the main advantage that credit cards can bring is the potential to boost growth. “Imagine you’re a small business owner with a growing team. One of the first things you may do to help you scale up is provide a manager with a company credit card to help reduce friction and empower them to get things done. As long as you have the ability to track their spending against agreed budgets, you’ve taken an important step towards growing your business.”

ACA-qualified portfolio CFO and fundraising expert Matthew Grimsdale says credit cards can be particularly useful for owners who have to work around seasonality. “One of my clients is a yacht broker. During the build-up to summer, they’re incurring quite a lot of upfront costs. Having the flexibility of being able to use a card as a line of credit in that part of the business cycle – and then, 30 days later, start paying it off when sales begin to come through – is a powerful tool.”

Credit cards can also help growing businesses to show they are in sound financial health. “Even if you have cash reserves in the business and don’t strictly need a card, sticking to minimum spend and paying it down in full within a month can help you build a decent credit score, which you can use to leverage other financial products while you’re scaling,” Grimsdale says.

No surprises

However, steep debt accumulation is a risk to be aware of. “While convenient, credit cards can lead to a slippery slope if not managed judiciously. The high interest rates associated with them can exacerbate debt levels – particularly at economically challenging times,” Smith warns.

Running up heavy debts and mismanaging repayments can have a constraining knock-on effect, Grimsdale agrees. “Some owners look to plastic when they have limited credit availability. But if things start to go wrong with the card, that can impact upon the firm’s credit score and limit its options for securing other, perhaps more suitable, sources of finance further down the line.”

If an owner is wrangling multiple cards, that can also present significant stress. “An SME I know with around 30 employees worldwide has seven credit cards in play,” Grimsdale says. “That’s quite hard to keep track of – especially if you have cardholders who are doing lots of overseas travel.”

Effective credit card management in an SME hinges on not having any nasty surprises, Worsfold says. “Know your budget, cash flow forecast and repayment deadlines. Every owner should become really good friends with their accountant. You never know where you may have a blind spot – and cash flow has the worst blind spots of all.”

Regardless of the size of organisation, setting clear policies and procedures is key, Grimsdale adds. “That goes from the smallest of firms to the very largest. You do hear horror stories about how staff at, say, consultancy giants have severely abused credit cards – and that’s a direct result of not having clear governance and authorisation structures around them.”

Fine print

For Grimsdale, there is a list of ‘don’ts’ that business owners should take on board when using plastic. “Don’t rely solely on credit cards. Don’t be blind to their interest rates and fees. Don’t just make minimum payments – stick to capital repayments wherever possible. Don’t overspend. And don’t fail to provide your finance team with documentation on what you are spending.”

Smith, meanwhile, has his own pet hates. “Don’t mix personal and business expenses. That can lead to accounting complexities and potential tax issues. And don’t ignore the fine print: understanding your card agreement’s terms and conditions is crucial for avoiding unexpected fees or charges.”

In Worsfold’s view, the biggest trap that owners can fall into is not being intentional about how they are using credit cards. “Used correctly, they have an important role to play in small business financing. The rise in credit card usage and costs is symptomatic of trends in the broader economy. Inflation remains high and, as such, interest rates have been rising. When this happens, other forms of financing can be harder to get. If you’re in doubt about the best way to borrow money, speak to an expert. Don’t go it alone and hope for the best.”

ICAEW Head of Business Simon Gray says cash flow and working capital management are issues regularly highlighted by ICAEW members working in small businesses. ICAEW recently contributed to the UK Parliament Treasury Committee’s Call for Evidence: SME Finance, highlighting challenges and proposing ideas for how to improve the situation. 

“Against a backdrop of challenging economic conditions, members have reported an increase in late payments and difficulty in accessing finance,” Gray says. “While credit cards may provide a short-term solution, the higher interest rates make them an expensive form of finance – with the risk of entering increased financial difficulty if left unchecked,” he adds.