A small business credit card is among the most valuable assets for business owners. The cards offer numerous advantages, from streamlined expense tracking to rewards programs, including cash back on purchases, airline miles and other benefits. Additionally, a small business credit card can be invaluable in building a credit history for entrepreneurs with little or no other evidence of their ability to repay debts.
Basics of Choosing The Best Business Credit Card
A small business credit card functions similarly to a personal credit card, with added features designed for business needs. To qualify, applicants generally need a registered business—though sole proprietors and freelancers can also apply—and must provide some financial history, such as a record of personal credit card usage and repayment, bank statements or other financial data.
When approved, the business receives a credit limit. Cardholders are then able to make purchases up to this limit, with the expectation of repaying the balance by the due date to avoid interest charges. Business credit cards typically have higher spending limits than personal credit cards and offer enhanced tracking of purchases for year-end reporting.
Key differences between small business and personal credit cards include higher spending limits and tools for expense tracking. Additionally, business credit cards often report payment activity to credit bureaus (Equifax, Experian, and TransUnion), further enhancing a company’s credit profile.
Using A Business Credit Card To Build A Credit History
A suggestion I frequently make to business owners who do not have an extensive history of paying back debt is to open a small business credit card, use it for business purposes only, and pay off the card on time and in full each month. This is a quick and effective way to start building a positive credit history and thereby enhance credit scores. Doing this can unlock other credit opportunities in the future.
Related: Increase Creditworthiness To Keep Small Business Loan Interest Rates Low
The key is to make regular business purchases and to pay them off promptly. This helps establish creditworthiness. To ensure that you make payments on time, set up the autopay feature that most credit cards offer. This is an easy way to make sure payments are never late… just be sure that there is enough money in the bank account linked to the credit card to cover the charges. Late payments and insufficient fund charges counteract the benefits of using business credit cards to build a credit profile. It is extremely important to charge only what you can afford to pay off each month and to do it before the payment due date.
Other Benefits Of Small Business Credit Cards
· Simplified Expense Management: An important benefit of having a small business credit is that it enables a business owners to separate business and personal expenses. By centralizing business-related purchases on one account, business owners can quickly and easily review transactions online and regularly manage spending activities. An added benefit is that business credit cards provide the ability to run detailed monthly or yearly reports by expense category.
· Access to Rewards and Perks: Business credit cards often come with robust rewards programs tailored to business needs. These include cash back, travel points, or discounts on goods and services.
· Cash Flow Management: Business credit cards can help bridge gaps in cash flow, especially during periods of irregular revenue. By leveraging a card’s grace period—the time between a purchase and the payment due date—businesses can make essential purchases without immediate cash on hand.
Related: The 5 Best Ways To Manage Seasonal Cash Flow
· Employee Spending Control: Business credit cards encourage company owners to issue additional cards to employees. Owners have the opportunity to set spending limits on employee cards to ensure they stay within budget when making standard business purchases or entertaining clients. However, it is ultimately the business owner’s responsibility to ensure that employee cards are used properly and not abused.
What To Consider When Choosing A Business Credit Card
Different benefits appeal to different business owners. Let’s examine the perks that credit card companies typically offer:
1. No Annual Fee: Some issuers offer credit cards that do not carry an annual fee at all or waive the fee for a certain period of time, usually a year. Cost-conscious entrepreneurs will look for such values. For some people, not having an annual fee is a big selling point. Cards that offer this benefit include the Chase Ink Business Unlimited® Credit Card, a great card for common business expenses. There is also no annual fee, and an introductory annual percentage rate (APR) of 0% for the first 12 months on purchases.
2. Interest Rates: The average credit card interest rate is 22.76% for new offers and 21.76% for existing accounts, according to WalletHub’s Credit Card Landscape Report. Today, anything below 20% would be considered a good rate. The better your credit score, the better the interest rate you will typically be offered. The highest rates right now approach 30%, and there is no federal limit on the interest rates credit card companies can charge. Owners Bank MasterCard® Rewards Card offers an 16.99% APR (varies based on the Prime Rate), as well as a Rewards program for travel, gift cards, and merchandise.
3. 0% Balance Transfer: A 0% balance transfer card enables the cardholder to better manage existing debt, consolidate balances from multiple cards to just one card, save on interest payments during the introductory 0% transfer period (often 12-21 months) and provide temporary financial relief from high interest credit card payments. Consolidating debt onto one card also makes it easier to track past debt, as well as new expenditures.
0% balance transfer repayment does not mean it is entirely free; typically the new credit issuer will issue a surcharge of 3-5% of the transferred amount at the start. If you use a 0% balance transfer card, be sure to pay it off as quickly as possible to enjoy the full benefit of the temporary waiving of interest payments. For instance, The Citi Simplicity® Business MasterCard offers 0% intro APR for 21 months on balance transfers. After that, the percentage rate jumps to the 18.24% – 28.99% range.
4. Cash Back, Travel Benefits, and Gift Card Rewards: Many card holders base their selection primarily on the rewards that are offered.
- Cash Back on purchases is a popular perk. Bank of America Business Advantage Customized Cash Rewards offers 3% cash back on categories such as gas, office supplies, or travel, while also earning 2% cash back on dining and 1% on all other purchases. It also offers a generous welcome bonus: a $300 online statement credit after making at least $3,000 in purchases in the first 90 days of opening the account.
- Travel rewards. Cards, such as UMB Visa Business Rewards Credit Card, cater to small and mid-sized businesses looking for travel benefits and flexible rewards. For business owners who travel frequently, American Express Business Platinum Card® cardholders gain access to over 1,400 airport lounges worldwide, 5x Membership Rewards points on flights and hotels booked through Amex Travel, and complimentary elite status with hotel programs like Hilton Honors and Marriott Bonvoy. Travel rewards are commonly used to cut down on company expenses, although business owners may utilize the benefits for vacations or other personal activities.
- Gift cards. Many credit card companies enable their card holders to cash in the points they earn for restaurant vouchers, Starbucks gift cards, online shopping E-gift cards, and other goods and services.
Downsides Of Business Credit Cards
- Overuse: While an advantage of having a credit card is that you can buy now and pay later, it is still critical not to overuse credit cards. Control your spending. Don’t buy things that aren’t necessary and purchase what you can afford. If your credit card utilization (the percentage of your total available credit limit) is 30% or higher, it can hurt your credit rating. This is counterproductive for business owners that are trying to establish a positive credit history.
- Surcharges: Before COVID, most businesses did not charge a fee for paying via credit card. However, as businesses struggled financially from the pandemic lockdowns, they looked for ways to maximize revenues. One way was to set a 3% or 4% surcharge for using credit cards to cover processing fees that retailers and vendors formerly covered themselves. If you are not focused on building your credit score and instead want the best percentage rate, consider paying cash. Many businesses – especially restaurants – now bring you a tab that has two prices: a higher price for paying with a credit card and a lower price for those who pay in cash. You might find that you are saving more money by paying with actual dollars than you are with using a cash-back card.
- Late Fees: Let’s say you purchased inventory from a vendor at a good price for the items. If you forget or are unable to pay your credit card bill by the due date, the late fee can be $35 or more. Thus, incurring the late fee could outweigh the savings you negotiated with the vendor.
- Fraudulent Charges: If you provide cards to multiple employees, there is naturally an increased potential risk that they might overindulge in client entertaining or even charge personal items on their cards and not pay the company back. Be sure to set policies on using the company credit card and strictly enforce those rules if/when necessary.
While there are some downsides, the benefits to having and using business credit cards outweigh them. The cards offer a convenient payment method when you need to make purchases for your company. They can help build a positive payment history, which results in a higher credit score. Raising your credit rating can help secure other types of credit, including small business loans, which can be obtained for much larger amounts of capital at interest rates lower than what is offered by credit card companies. Additionally, using business credit cares responsibly can help improve cash flow, simplify financial management, and, of course, earn rewards.
By understanding how these cards work and carefully selecting the right one to meet your needs, you can enhance your business’s financial health and support its growth. With many excellent options available, there’s a card out there to suit every business type and budget.
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