The Business Credit Card

The Business Credit Card

Why You Need a Business Credit Card

For companies large and small, the business credit card can be a useful tool. They can offer rewards and benefits and create a great way of itemizing and tracking business expenses. In this article we are going to go through the various perks of using a business credit card and also some of the potential pitfalls to watch out for when using them.

First, you don’t need to be a large company to get one. You don’t even need to be incorporated or even a brick-and-mortar store to have a business credit card. Different card companies have a variety of what information it requires. Some, like Amex, are more flexible. Chase requires more proof of your business. But even if you only have a small dog-walking business you can qualify for a business credit card.

In most cases, your social security number will work if you don’t have an employee ID number. While a business credit card will give you a two to five point hit on your personal credit score when you apply because it is a hard inquiry. But long-term the business line of credit sits separately from your personal credit line so it won’t affect your personal credit score.

That means there’s no worry if you run big balances on this business card. However, do not default on this card, because they still can come after you personally since your personal credit originally guaranteed the card.

One of the best advantages of a business credit card is double dipping on sign-up bonuses. Many cards offer incredible bonus point opportunities depending on your spending amounts and with welcome opportunities. Cards also offer travel and dining bonus categories just like personal credit cards but tailored toward business customers. These can include:

  • Airline miles
  • US purchases for advertising in select media
  • US purchases for shipping
  • US purchases at gas stations
  • US purchases at restaurants
  • US purchases made from technology providers
  • Internet, cable and phone services

Another beneficial aspect of the business credit card is establishing business credit history. As your business grows, if you need to apply for capital loans or make real estate purchases, banks will look more favorably at your business line of credit as they make decisions to determine your interest rate. The more established you are, the better your rate will be.

Business credit cards give small businesses the credit line which is sometimes just the space they need to get going. They are not charge cards, so they do not have to be paid off every month. They are revolving credit. But the interest rates mean you could incur huge fees if you don’t pay the amount off every month. So, keep that in mind.

One of the biggest potential problems for companies using business credit cards is keeping business and personal expenses separate. Large or small, it is critical for anyone who is given a business credit card to use care in charging only business expenses to that card. It isn’t illegal to charge personal expenses to a business card, but it most likely violates the terms of your cardholder agreement so it’s best to keep personal expenses off your business credit card. Here are some other consequences:

  • If your business ends up in legal trouble, making personal charges to your business card could make you personally liable. If you’re a small business, you likely already had to provide a personal guarantee to get the card so you’ve already assumed some risk. Charging personal expenses just opens that door wider.
  • Personal purchases have less protection on a business credit card. On a consumer card, those purchases are covered by the CARD act which includes things like prevention of raising interest rates without notice, raising interest rates on existing balances, interest charges on debts paid on time and application of payment to highest interest rate charges first. Business credit cards have none of these protections so running up high personal charges could run you into big debt.
  • If you are already in personal finance trouble and you use your business credit card to help you out, you run the risk of hurting both your personal and business credit scores. Your scores aren’t connected except in the initial inquiry so one won’t affect the other on an ongoing basis. But if you start to have trouble paying off your business credit card, your personal credit score may take a hit.
  • Charging personal expenses on a business card will cost you more in the long term. Business cards tend to have higher annual fees and interest rates. They are designed to be paid off each month and that all the expenses are tax deductible. Plus, you’ll be taking funds away from your business.
  • It will be harder to track business expenses and taxes will be more difficult when your credit card statements don’t have just business expenses. Your accounting department has to do more work to categorize your credit card statements and know what expenses are what. And it will cause even more problems should you ever face an IRS audit.

So, what if you accidentally use your business credit card for a personal purchase? It’s not the end of the world. It happens. Make sure you flag it immediately and report it to accounting. Pay back the expense as required by your company if you aren’t the sole proprietor.

Are there things you shouldn’t charge on a business credit card? Well yes, a few. As discussed above, because business credit cards have no protections, interest rates can rise without notice and charges can be made at the highest rates possible. Making good choices on what to charge on your card is of greatest importance. Avoid these:

  • High-dollar items: They aren’t always your least expensive loan. Credit card’s APR are generally higher than a bank loan APR.
  • Business Trip Extras: Meals and hotels and maybe even a few drinks with clients are justified business expenses. A spa day is not.
  • Payroll: Payroll is one of any company’s largest expenses. If you’re having to finance it, you’re in trouble. It would be a huge expense to finance. If it is necessary to borrow the money, look for a cheaper line of credit.
  • Legal Settlements: Payments to lawyers signals trouble to credit card issuers. And big payments, if they can’t be paid off in a month, are going to tack on interest amounts as well.
  • Cryptocurrency or High-Risk Investments: Some credit cards won’t even let this happen. But if you card will, you shouldn’t. If you’re trying to grow your business capital, you shouldn’t use credit as a source of cash.
  • Cash Advances: This is another signal that your business is in trouble. Depending on how often you do it, it could raise red flags and scare prospective lenders. Your current card issuer could choose to raise your interest rate, lower your limit or close your account.

For the most part, the business credit card climate is good. In one 2017 survey, 77% reported that card issuers hadn’t changed their credit lines within the year, while 18% received a credit line increase. Only 5% had their credit lines cut.

Now you know the ins and outs of using and misusing your business credit card. Used correctly it can be an effective business tool.