Credit cards, and their often rich rewards programs, are fantastic options for day-to-day business spending. Many small business owners even shift all their personal spending to their favorite business credit card in an effort to build up points more quickly. After all, small business owners work hard; they deserve to enjoy their hard earned reward travel. However, if you’re among the 47% of American small businesses that revolve a balance on their business credit card, you may be discovering the dark side of your credit card perks.

The True Cost of Credit Cards

Credit cards charge finance fees based on Average Daily Balance (ADB), not just on the amount you revolve. This means that although you make your best effort to pay most of your balance each month, you still get charged interest on much of what you’ve paid back. If the average balance you carried throughout the month was $10,000, you will be charged interest on that full amount, despite having only carried over a balance of $1,000 – $2,000.

This is more than a theoretical issue for American small businesses, who are often faced with more payables due than cash available at month’s end. Most businesses experience a natural cash flow gap between when they produce or contract to sell goods and services, bearing labor and materials expense, and when they receive payment. Without the relatively infinite access to cheap capital enjoyed by their Fortune 500 competitors, small businesses often have no choice but to make the costly decision to revolve some portion of their credit card balance to make the month’s end close. This problem is only exacerbated in a growing business, with each month’s demand-related expenses perpetually exceeding incoming receivables from prior, smaller revenue months. It is easy to get stuck in a revolve trap.

Think Before You Swipe!

You may not have the benefit of a robust savings account or large line of credit. And although those credit card reward programs may seem like a treat, consider the cost of those treats when you factor in fees and interest.  Invoice financing, also known as “accounts receivable financing” or “invoice factoring,” is one way to bring cash into a business by offering the business’ unpaid invoice value as collateral.  Factoring could be the treat you were looking for.