Most business owners start out needing resources to sustain themselves during their companies’ early stages. Owners need everything from a computer and a telephone to specialty equipment.
But obtaining financing as a new business can be challenging. That’s where a business credit card comes in. A business credit card can help you get the working capital you need, build your business credit history and get valuable benefits along the way.
Even if your business is well established, there are many reasons to consider getting a credit card for everyday expenses. Keep reading to find out if you should get a business credit card or not.
How Do Business Credit Cards Work?
A business credit card is a revolving line of credit that you can use to pay business expenses. It works similarly to a personal credit card, but it’s designed for business expenses instead of personal or family-related needs.
While you can technically use a personal credit card for business expenses, here are some comparisons of business credit cards vs. personal cards and why a business credit card is generally better:
- Higher credit limits. Small-business credit cards typically offer higher credit limits because businesses usually have more expenses than households. If you use a personal card, you could end up compiling a high credit utilization rate, which could hurt your credit score.
- Building business credit. Personal credit cards can’t be used to build your business credit history, which is important to obtain financing for your company in the future.
- Business-specific rewards and perks. If you spend a lot in common business categories, such as office supplies, advertising and shipping, you can find business credit cards that offer bonus rewards on that spending. Also, business credit cards often offer other benefits that are more valuable for business owners, like free employee cards with the ability to set spending limits, itemized reports, compatibility with bookkeeping software and more.
Different Types of Business Credit Cards
As with personal credit cards, there are many different types of business credit cards. You can choose one based on the needs of your business and your own preferences. Options typically include:
- Cash back cards. If you’re interested in getting cash back rewards that you can direct back into your business or use for personal expenses, there are cards that offer a flat rewards rate on everything or a tiered rewards system that offers bonus rewards on certain spending categories.
- Travel cards. If you prefer earning points and miles that you can use to pay for business or personal trips, there are several cards that offer flat-rate or tiered rewards, often with large sign-up bonuses.
- 0% APR cards. While 0% annual percentage rate credit cards are less common among business credit cards than personal ones, there are a handful of solid options. These can come in handy if you have a lot of expenses but not enough revenues to pay them off immediately.
- Secured cards. Business credit cards typically require a personal credit check when you apply. If your credit is in poor shape, your only option may be a secured business credit card. These cards require an upfront security deposit, typically equal to your credit limit, but can still be instrumental in helping you build your business credit history.
If you’re thinking about getting a business credit card, shop around and consider your options to determine the right one for your company.
“Determine which card offers the most attractive package of rewards and services that will match your business needs,” says Michael Fischer, a certified financial planner and wealth advisor at Round Table Wealth Management. If you just want flexibility with cash flow but don’t plan to carry a balance, Fischer recommends a rewards card with a big sign-up bonus. “If you expect to carry some revolving debt, the benefit of a lower interest rate likely far exceeds the sign-up bonus rewards,” he adds.
Benefits of Business Credit Cards
There are many ways a business credit card can add value to your small business. Here are some of the top advantages one can provide:
Build your business credit history. Business credit cards can be a great way to establish a business credit score, which can be challenging for new business owners.
When you use your card responsibly and make your payments on time, it can help you build your business credit enough to the point where you can apply for other forms of affordable business financing.
Keep in mind that there are other steps to building a business credit history, such as obtaining an employer identification number, applying for a D-U-N-S number and more.
Manage your cash flow. Like personal credit cards, business credit cards allow you to make purchases without needing to pay for them immediately. Each month, you’ll receive a statement, and your due date is typically a few weeks later, giving you time to earn the income you need to pay your bill.
As long as you pay your bill on time and in full, you won’t have to pay any interest. Even if you can’t pay your bill in full, business credit cards allow you to carry a balance, giving you some flexibility with your cash flow.
“A small-business credit card would allow you to work through many of the ebbs and flows that are typical in a normal business cycle,” says Fischer. “Business owners can carry credit balances in leaner times and pay off bills during peak revenue periods.”
Simplify employee expenses. Dealing with employee reimbursements can be time-consuming. Instead of going through that process, consider adding employee cards to your business credit card account.
Employee cards are usually free, and you can set spending limits to avoid errant spending.
Earn rewards. The rewards you earn with a business credit card, whether it’s in the form of cash back, points or miles, are yours to use as you wish. Many small-business owners rack up thousands of dollars in rewards that they can use to continue building their business or for personal reasons.
Some have even used their credit card rewards to provide additional benefits to their employees, such as gift cards, vacations and more.
Simplify accounting and taxes. Separating your personal and business expenses is crucial to building a successful business, and a business credit card can make it easier to separate the two.
“Never mix your personal and business finances,” says Rob Stephens, founder of CFO Perspective, a company that gives financial advice to small businesses. “Combined accounts create a nightmare for tax preparation. It’s much harder to track the profitability and cash flows of your business. Combining finances may also jeopardize the limited legal liability provided by some company legal entities.”
What’s more, many business credit cards offer easy syncing and importing with popular accounting software, so you don’t have to manually update your expenses.
Drawbacks of Business Credit Cards
While there are many clear reasons to consider getting a business credit card, it’s not all positives. Here are some potential pitfalls to keep in mind:
A personal guarantee is required. Virtually all small-business credit cards require a personal guarantee when you apply. This means that if your business can’t pay off the charges you’ve put on the card, you’re legally responsible for paying them using your personal assets.
Because businesses have a high rate of failure during the first few years, you’re taking on that risk, even if you have a limited liability company that shields you from other liabilities.
They can impact your personal credit. When you first apply for a small-business credit card, the card issuer typically runs a hard inquiry on your personal credit reports. While this doesn’t impact your credit score by much, it can hurt your score if you’ve applied for a lot of credit accounts recently.
Additionally, some business credit card issuers report negative information to the consumer credit bureaus. As long as you pay your bill on time, though, you can avoid this.
Still, other card issuers, including Capital One and Discover, report all of your account activity to the consumer credit bureaus. This means that if you rack up a high balance relative to your credit limit, it could hurt your personal credit, even if you’re paying your balance in full each month.
As you shop around for a card, learn about whether that card issuer reports to the consumer credit bureaus and how.
They are potentially expensive. While business credit cards are more affordable than merchant cash advances and other forms of short-term business financing, they’re still not cheap. If you think you might have to carry a balance over a long period of time, a business credit card can end up costing you big time in interest charges.
Should I Get a Business Credit Card?
While using a business credit card can add value to your business, it’s still a financial obligation that both you and your company are responsible for. Take your time to consider both the benefits and drawbacks of credit cards and how using one can help you build your business.
If anything, consider using one as a way to put yourself in a better position to get the financing you need to expand your business down the road.
“You want your company to build financial strength, so owners no longer need to make personal guarantees,” says Stephens.
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