Business card benefits outweigh limitations for most businesses
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I've heard that my small business
credit card does not offer the same protections as my personal card. Why is
that, and does it mean I should switch to my personal card instead? -- Confused
Your question is a smart one to be asking these
days. In the wake of the credit crunch, many
businesses still can't get small business loans and must rely on credit cards
to deal with cash-flow crunches and financing needs. That means the cards you
choose will have a bigger impact on your business than if you were able to
spread your loans among several types of lenders.
As a 2010
report issued by the Federal Reserve Board noted, small business credit cards bring certain advantages over personal ones
used for business: They often have higher spending limits and offer options
such as adding employee cards with preset spending limits. The report found that in
2003, average interest rates on small business cards were lower than on personal
cards used for business. The
data also indicate that the minimum APR for new purchases tends to be slightly
lower for business cards than for personal cards.
Using small business credit cards can minimize
paperwork hassles, too. They typically offer convenient features, like detailed
monthly and quarterly expense tracking and annual spending reports you can
download into your accounting software, notes David Sussman, CEO of Valcor, a
small business advocacy firm based in Anaheim, Calif. Maintaining a separate
business card can also help you avoid confusion at tax time about which
expenses are for business and which are personal. "At the end of the year,
are you going to go through all of your receipts?" he asks.
Setting aside a personal card for business might
also help you to avoid confusion. However, experts say that if you've formed an
limited liability company or LLC, keeping your business expenses separate from your personal ones can help
you to keep your personal assets -- such as your house -- protected if you are ever
sued. Having a credit card with your business's name on it provides proof that
you operate the company separately from your individual finances.
What's more, a business card will help you build a
separate credit history for your business.
Given all of these advantages, nearly two in three small companies opted for business credit cards in 2009, when
the Fed did its research. About four in 10 (41
percent) used personal cards for business expenses.
That said, there are serious downsides to consider.
Small business credit cards typically require a personal guarantee -- meaning
that if you're running up substantial charges for your business and can't pay
them, you're responsible. "A lot of people think, 'If I get a card in my
business's name, it's separated from me,'" says Sussman. Not so. "If you don't
pay the bill, they will come after you personally." And there's no easy out.
Under the Dodd-Frank Act, it's tougher to file for personal bankruptcy
protection, he notes.
At the same time, you don't get as many protections
under the Truth in Lending Act as you would with a consumer card. The law requires
consumer card issuers to make detailed disclosures that help you compare the
cost of using them. The main protection business card holders get under the
law, through 1974 amendments, is from being subject to more than $50 in
Nonethless, many small business card issuers
voluntarily disclose details such as annual percentage rates, finance charges and
penalties, using the same type of tables they do for consumer cards, the Fed report
Consumers won some extra protections under the Credit Card Accountability and Disclosure Act of 2009, but these do not apply to small business cards. For instance, consumers
must get 45 days' written notice of rate increases on new transactions and must
be given the choice whether to pay "over limit" fees if they make
charges over their credit limit (otherwise, charges get rejected). The Fed found
that some small business card issuers are adopting some of these terms for their
business cards voluntarily, but, since not all do so, you need to look
carefully at any agreements you sign.
The upshot: If, like most business owners, you pay
your balances in full each month, these terms won't affect you much -- and there's
probably little benefit in switching to your personal card. However, if you carry a balance and make
frequent new charges, using a personal card instead may protect you from sudden
See related: In case of default, business credit cards get personal, 10 ways business credit cards are different, New Fed rules don't cover business, corporate credit cards
Elaine Pofeldt is a journalist who specializes in entrepreneurship and careers, contributing to publications such as Fortune, Money, Working Mother and many others. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals.
Elaine answers a question about small business and credit from a CreditCards.com reader each week.
Send your question to Your Business Credit.
Published: January 14, 2013