Used wisely, small business cards can keep business afloat

By Tamara E. Holmes

Wisely used, credit cards can be a convenient source of cash for anyone. For business owners, however, the stakes are often higher since credit cards can help small businesses stay afloat.

Credit cards are the biggest source of financing for small business owners, with 44 percent of small businesses having used credit cards in the last 12 months to help finance capital needs, according to the National Small Business Association's 2008 Survey of Small and Mid-Sized Businesses.  And of all types of loan sources for capital financing, credit cards top the list. (See Small business credit card comparison chart.)

While any credit card can provide a business owner with a quick cash infusion, a business or commercial credit card offers entrepreneurs a lot more. "Small business owners have different needs than consumers," says Rosa M. Alfonso, a spokeswoman for American Express OPEN, a division of the company that caters to small business owners. With an understanding of the ins and outs of business credit, business owners can use business credit cards as a financial tool and incorporate their perks and rewards into their business strategies.

No one doubts the importance of credit cards in the business community. They are "an indispensable source of funding for small businesses," the American Bankers Association said in written testimony before Congress in April 2008. Not only do they provide quick capital for emergency purchases, but business owners often depend on credit cards to solve cash flow problems. Credit card loans are guaranteed by the business owner's promise to repay the debt, making them ideal for small businesses without the earnings or history to qualify for a traditional business loan.

But business credit cards also offer other benefits that have little to do with cash:

Business credit cards ease financial management. One of the first rules of business is to keep business and personal expenses separate, says Randy J. Elder, a certified public accountant in Phoenix. "The easiest way to do that is to get a separate business credit card." Not only will it be easier to determine business expenses for tax preparation, but it becomes easier for business owners to track their spending since their monthly credit card bill has all purchases outlined in one place.

Employee purchases can be monitored. Some business credit cards give business owners the flexibility to limit how much employees are able to spend on the card, as well as where they can make purchases. For example, Discover's Business Credit Card comes with free employee cards with customizable spending limits. As a result, business owners end up having more control over how the company's money is spent.

Business card rewards can help the bottom line.  Just as personal credit cards often offer consumers rewards to entice them to open an account, business card issuers typically offer business-friendly incentives, such as discounts on office supplies, free travel and low-cost business services, such as shipping. American Express' Charge Card for businesses, for example, gives cardholders savings on products and services offered by American Express partners such as Delta, FedEx Kinko's and JetBlue.

Card terms are geared toward businesses. Unlike consumers who typically can count on a monthly paycheck, business owners may receive a large cash infusion one month and little the next. Some business card issuers have programs designed to address that problem. American Express' Plum Card gives cardholders a discount if they pay in full within 10 days or lets them defer payment for up to two months if they pay 10 percent of the balance.

Making the grade: How you can qualify
While it's easy to see the benefits of using a business credit card, it may be more difficult to be approved for one, particularly in this tight credit environment, according to Raymond Joabar, senior vice president and general manager for American Express OPEN. When determining whether a business owner should be issued a card, lenders look at both the business owner's personal payment history and the business' payment history to determine the interest rate, as well as the credit limit, but the following steps can increase your odds of being approved:

Keep your credit score high. Unless your business is a separate entity with a long history of hefty profits, the card issuer will look at your personal credit to determine whether you're likely to repay your debts. The better your personal credit score, the better chance you will qualify for a business card with favorable terms.

Establish your business's credibility. Make it as easy as possible for card issuers to see that your business is a real entity, Joaber advises. He says this can be done through such actions as opening a separate business checking account and registering your business with bureaus such as Dun and Bradstreet and the Small Business Financial Exchange.

Maintain licenses and insurance.  If your business requires a license or is at risk of any type of liability, make sure licenses and insurance policies are up to date, since a card issuer could look at lapsed policies as a sign that the business isn't legitimate.

Use business credit to build business credit. Since terms such as the interest rate and credit limit are based largely on past credit history, you may not be offered the best terms at first. However, you can use your business credit card to begin to establish a business credit history. (See Business credit scores: What they are, how to boost yours). Once you can point to responsible use of the card, ask the issuer for better terms. "Over time, your account history, timeliness of payment, your credit records and how much spending and capacity you need all play into the kind of spending limit you get," says Alfonso. "So as your business grows, you've got to think that your spending limits are going to grow over time."

Managing business credit wisely
Getting a business credit card is only the first step. Using that card strategically to run your business as efficiently as possible is just as important.

Don't use it for personal expenses.  While it may be convenient to pay for business and personal expenses at the same time, use a separate card for the two types of purchases, says Elder. You'll eliminate the advantage that business credit cards give you in terms of allowing you to track monthly expenses if you "muck up the system with personal expenses."

Pay the balance off monthly. Many of the same rules apply to business credit cards as to personal credit cards. For example, make sure you pay the balance off monthly, or as soon as possible, so you don't incur a lot of interest, Elder advises. Even if you can't pay the entire balance, pay on time to avoid late fees and an increased interest rate.

Watch your credit limit.  It's no secret that credit card issuers have been cutting the credit limits of consumers in recent months. Small business owners aren't exempt from this practice, so keep an eye on your credit limit to make sure you're not nearing the limit.

Be discerning about debt. Unless you can pay the balance in full immediately, refrain from buying items that will leave you in debt unless the debt will help you increase your business's revenues, says Joabar. Examples of good debt include hiring key employees and purchasing new equipment that will help the business to grow.

What's at stake: Understanding liability
Business credit cards are different from personal credit cards in that they are geared toward business rather than consumer use, but a cardholder may still be liable even if the business closes its doors. If people are operating a business as a legal entity corporation or an LLC (limited liability company), "they may be personally liable on debts incurred by that business if they signed a personal guaranty on the debt," says Weldon Reed Allmand, a partner with Allmand & Lee, a bankruptcy law firm in Dallas. If you're wondering what you may be liable for, consider the following:

Understand your business structure. If you're running a sole proprietorship, you're liable for charges on the business card. On the other hand, "if a card is in the business's name only, and the business owner files a personal bankruptcy, the owner would not be liable for the business debt," says Jonathan Ginsberg, a bankruptcy attorney based in Atlanta. 

Review the card's terms. Check the cardholder agreement, since it will spell out liability terms. "Some products offer 'commercial liability,' which means that the business is held liable. Some products offer 'joint and several' liability, which means that the individual business owner and the business is held liable," says Alfonso.

Know the consequences of default. Just as a default on a personal credit card will lead to a hit on your personal credit score, a default on your business card can impact you tremendously as well. The issuer likely will report the default to the consumer credit bureaus if the agreement states that you have personal liability and will report it to commercial credit bureaus, which track the credit history and fiscal health of businesses. As a result, you may have trouble getting business credit in the future.

While having a business card at your disposal can offer peace of mind, continue to compare rates, rewards and perks frequently to make sure you have the card that does the most to improve your company's day-to-day operations. After all, card issuers are constantly looking for ways that they can be of service to the 10 million small businesses that use them.

"We're constantly evaluating what business owners need and adding those services because we know our customers need them and use them," Alfonso says.

See related: Small business credit card comparison chart, Business credit scores: What they are, how to boost yours, Lower credit limits can hurt consumers' credit scores, cutting the credit limits, How to keep a small business credit limit from being cut, Small business credit cards help balance capital needs

Published: January 30, 2009

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