Used wisely, small-business cards can keep business afloat
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 a major source of financing
for small-business owners, with 31 percent of small businesses having used
credit cards in the past 12 months to help finance capital needs, according to
the National Small Business Association's (NSBA) 2012 Year-End Economic Report. And of all types of loan
sources for capital financing, credit cards are near the top of 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. "There are plenty of benefits to using a business
credit card versus a personal credit card for your small business," says Alison
Cahill-Rouse, a spokeswoman for Capital One.
"You'll also have access to business-specific benefits, such as employee
cards and spending controls, and specialty service tailored to meet small businesses'
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
No one doubts the importance of credit cards
in the business community, which have resurged after a dramatic tightening of the business credit card market during the recession. "Cards continue to be important to small enterprises, and with the business of issuing small-business credit cards returned to profitability, supply should be sustained," reports Frank B. Martien, a partner at First Annapolis Consulting in a Dec. 2012 Federal Reserve report. "Cash flow requirements are cited as the most common credit need among small business," said Martien in the report. Martien also cited that more than 80 percent of small businesses get a credit card after five years of operation.
Plus, according to the National Small Business Administration's "Small Business Access to Capital Survey, 37 percent of small businesses turned to credit cards to help with financing capital needs during a 12-month period from May 2011 to May 2012.
Take Crystal L.
Hendrick, the owner of a marketing firm based in Cincinnati, Ohio.
Hendrick used business credit cards to launch and finance her business. "I
searched for various bank loan options; however, the
only unsecured financial option offered to me
was a credit card," Hendrick says
But business credit
cards also offer other benefits that have little to do with cash:
credit cards ease financial management. One of the first rules of business is to keep
business and personal expenses separate. "Having a small-business credit card will help you separate your business
and personal expenses, which will make cost tracking easier, as well as
preparing tax returns at the end of the year," says Cahill-Rouse.
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.
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, Bank of
America's WorldPoints Travel Rewards for Business Visa provides free employee
cards and lets business owners set spending limits of each of them.
credit cards offer higher spending limits. Business credit cards typically offer higher spending
limits than consumer credit cards. For example, Wells Fargo's Business Platinum
Credit Card has a $50,000 credit line available and gives business owners
access to up to 99 credit cards, while Wells Fargo's Business Elite Card has a
credit line available of up to $100,000 and provides up to 200 credit cards for
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,
including discounts on office supplies, free travel and low-cost business
services, such as shipping. Chase's Ink Cash business credit card, for example, offers 5 percent
cash back on the first $25,000 spent each year at office supply stores and on
phone, Internet and cable television services.
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' Enhanced Plum Card gives cardholders a
discount for paying early or up to 60 days to pay without interest.
The down sides of
Business credit cards are not a perfect solution; they are not covered by the Credit CARD Act of 2009, so issuers can legally
engage in practices that have been outlawed in the consumer credit card space,
such as retroactive interest rate hikes and double-cycle billing.
"All those deceptive practices that credit card companies were
allowed to do to consumers prior to that law passing can legally be done with a
business card," says Molly Brogan, a spokeswoman for the NSBA. While most card
issuers have extended the consumer protections to their business card clients,
Brogan says, business owners should stay on the lookout for
potentially changing credit card terms.
Many small-business owners have also said that the terms of their
business credit card agreements have worsened in recent years. According to the
NSBA, 56 percent of small-business owners have cards with an interest rate higher than 15 percent, and 22 percent of
small-business card users have an interest rate above 20 percent.
the grade: How you can qualify
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. Lenders also may look at the
business's past earnings. For example, Bank of America suggests having your
Social Security number, business tax ID and business gross annual sales and net
profit for the past fiscal year on hand when applying for a business credit
To increase your odds of getting approved for a business credit card:
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.
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
Apply for the right credit card product. Some business cards target large businesses while others are
more geared to a small company or a sole proprietor. For example, Wells Fargo's
Elite business card is for businesses with annual sales of more than $1
million, points out Wells Fargo spokesman Jim Seitz. If your business is
smaller than that, you'd be more likely to qualify for the company's Business
Platinum Credit Card, which is geared toward smaller companies.
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.
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.
One of the first rules of business is to keep
business and personal expenses separate.
|-- Randy J. Elder
Certified public accountant
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
Use good credit sense. Many of the same rules apply to
business credit cards as to personal credit cards. For example, make sure you
don't go over your credit limit, and pay the balance off monthly, or as soon as
possible, so you don't incur a lot of interest.
Know your liability
Credit card issuers typically have the business owner sign a guarantee on
the credit card debt, says Ed Boltz, a Durham, N.C.-based bankruptcy attorney and
the president of the National Association of Consumer Bankruptcy Attorneys. If
that's the case and you default on the money that's owed, the issuer would
likely report it to commercial credit bureaus, causing a hit to your credit
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
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 many small businesses that
See related: Qualifying for business credit cards is personal, Business card benefits outweigh limitations for most businesses, How to keep a small-business credit limit from being cut
Updated: February 13, 2013
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