How do business credit cards work? Pros and cons for small business owners

As a small business owner, you know that managing your cash flow can be challenging. Working capital might feel tight, and it’s hard to keep track of how much money is going in and out of the company. One solution to help streamline your finances is a business credit card.

But does it make sense for your specific situation?

On the surface, using a business credit card may seem convenient; however, there are multiple factors to consider.

In this article, we’ll explain how a business credit card works, what you’ll need to acquire one, and its advantages and disadvantages.

What is a business credit card?

If you own a business, a business credit card is worth considering rather than using your personal credit cards.

These cards offer unique benefits that cater specifically to the needs of small businesses. For example, you can enjoy higher credit limits, better rewards, and useful tools to manage spending and employee expenses.

As a business owner, keeping up with fixed expenses like rent and utilities is important, even during slow seasons when demand for certain products may be lower. To help manage fluctuations in cash flow, using a business credit card could be a practical option.

How does a business credit card work?

Business credit cards operate similarly to personal credit cards. You make purchases on the card and receive a statement at the end of each billing cycle showing your total balance owed and the minimum amount due.

Paying your bill in full each month is best to avoid interest charges. However, if you decide to carry a balance, interest will start accumulating on the owed amount.

Business credit cards have varying interest rates based on the creditworthiness of your business. The better your business credit, the more favorable your interest rate will likely be.

It’s important to note that some business cards function as charge cards, meaning they must be paid in full every month. However, charge cards often offer the benefit of not having a predetermined credit limit—great for companies with high-monthly business expenses.

Charge cards are also great for established businesses with predictable monthly expenses but not ideal for new companies with upfront costs or inconsistent income.

Will a business card impact my personal credit score?

To qualify for a business card, your issuer will examine your personal credit history and credit score. This is where personal and business finances collide.

It’s the same process as when you apply for a card in your name. Since you will be the one making payments, your creditworthiness will be at play when you apply for a business credit card. Sometimes, small business owners will even have to make a personal guarantee to secure the card.

If you have to make a personal guarantee, all debt liability is your responsibility if your business can’t afford the bill. This is a common tactic banks employ to protect themselves in the event your business goes insolvent.

There’s a chance issuers could report your outstanding debt, but it will likely not appear on your personal credit report unless there’s a problem.

Using your business credit card responsibly can help you build your business credit score, giving you access to larger lines of credit and business loans to help you grow your business.

How to apply for a business credit card

When you apply for a credit card for your business, the bank will ask for information about you and your company.

Business information to have ready:

• Tax identification number
• Company name and how it is structured
• Business financials (e.g., profits and sales numbers)
• Date of incorporation
• Address where the company was established

Personal information to have ready:

• Identification info
• Address
• Social Security number

Establishing and building business credit

Why do business owners need to establish business credit? The same reasons you want a good personal credit score: to be considered a favorable ‘risk’ in the eyes of creditors, thus allowing greater borrowing limits and better perks.

Building good business credit involves several steps, from legally setting up your business to opening the proper accounts and properly maintaining them.

1. Incorporation

Incorporating your business as a limited liability company (LLC) or corporation can add credibility to your company and legally separate it from your personal finances. It’s essential if you want to build a strong business credit profile.

2. Obtain an EIN

An employer identification number (EIN) is like a social security number for business taxes. This tax ID is needed for federal tax filings and to open a business bank account in the corporation or LLC’s name.

3. Open a bank account in your businesses' name

Open a business checking account in the name of your company. Use this account to pay for all business transactions, including the credit card bill if you use one.

4. Start a business credit file

A business credit file contains information about your company that is stored in a database by a business credit reporting agency. (Although related, it is not the same as a business credit report.) You can open a one with any of the big three credit reporting agencies.

5. Attain business credit card(s)

Get a card that isn’t personally tied to you or any other owners. Choose one from a company that reports to credit reporting agencies.

6. Start a line of credit with third parties

Work with several vendors you purchase from to establish business credit. Request they report your payment history to the reporting agencies.

7. Ensure timely payments

Avoid late payments that will adversely impact your business credit.

Benefits of small business credit cards

Similar to a personal credit card, a business credit card enables you to access a line of credit for the things you need to run your enterprise.

As business cash flow can be unpredictable, it is essential to have funds readily available for regular operations. A business credit card’s line of credit is a valuable solution for this purpose.

• More credit. Businesses have a lot of expenses, so they need a more significant line of credit than personal credit cards.
• Longer interest-free periods. Typically give you more time to pay off your balance (interest-free) than consumer cards.
• Additional incentives. If you frequently travel for business, you can earn cash back and other rewards for company expenses (including employee spending).
• Perks. Receive incentives such as discounted accounting software and special service discounts tailored to your business.
• Segmented spending. Keep your personal spending separate from your business expenses. This will come in handy come tax time.
• Sign-up bonus. Just remember, the greater the welcome bonus, the higher the annual fees.
• Add employee cards. Add employees to your account and grant them permission to make business-related purchases.  

Drawbacks of small business credit cards

• Less protection: Small business credit cards do not have the same safeguards as personal credit cards under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act protects consumers from unexpected interest rate hikes by credit card issuers, prevents double-cycle billings, and regulates various fees.
• Potentially-high fees: Some business cards have annual fees of several hundred dollars, but they come with greater rewards and benefits. However, there are also affordable options available.
• High APRs: Using a small business credit card to cover company expenses is typically more costly than obtaining a conventional business loan from a bank or an SBA loan. Business credit cards usually have high regular APRs, similar to personal-use credit cards.
• Credit check & guarantee: Your personal credit score will be evaluated when you apply for a small business credit card. This means you are typically responsible for any unpaid balances.

Final word

Business credit cards can be extremely helpful tools for business owners as they navigate their day-to-day operations and plan for future success.

With their high credit limits, generous rewards, and extensive interest-free periods, these cards allow business owners to get more out of the money they spend.

But remember, it’s also critical to consider the drawbacks, such as less protection than personal cards, potentially higher fees and APRs relative to conventional loans.

Before deciding on a business credit card, make sure to conduct thorough research to determine if it is the best choice for your particular situation and needs. Many resources are available online to help you make an informed decision that will set up your venture for long-term success.