Business credit cards can allow the owners of businesses both large and small to quickly generate rewards points, which they can turn into free airline miles or large cash-back bonuses. These credit cards can also come with higher credit limits, a tool that cash-strapped owners can use to purchase needed equipment and supplies to help their businesses grow.
But while small business credit cards can be helpful tools, they can also lead to financial problems if misused. The larger credit limits that come with these cards might encourage business owners to run up large amounts of debt that they then struggle to repay.
"Just like with personal credit cards, business owners can get themselves in a position where they can't pay down the debt they've generated," says Christopher Viale, board chairman of the Association of Independent Consumer Credit Counseling Agencies and president and chief executive officer of Agawam, Massachusetts-based Cambridge Credit Counseling Corp. "Business owners have to pay attention to how much they are spending."
Brent Reinhard, general manager of the Ink line of business credit cards from Chase, said that a business credit card gives entrepreneurs a tool for keeping their business finances separate from their personal finances.
"We think it is important to keep these two types of finances separate," Reinhard says. "When we talk to small-business owners we hear that they spend a lot of time managing their business' finances. Why would you make that job more difficult by co-mingling your business and personal finances? If you really want to spend time analyzing your business' finances, it's much easier if they are confined to one place."
Before applying for business credit cards, entrepreneurs need to understand both how these cards differ from traditional personal cards and the potential financial pitfalls that come with misusing this particular form of plastic.
The key differences
To qualify for a business credit card, you must be an "authorized officer" of a company. Basically, this means that you must have the legal right to enter into borrowing arrangements with financial institutions on behalf of a business.
If you are the owner of a sole proprietorship business or the sole owner of a small business, you are already an "authorized officer." You are, after all, the only owner of the company. It can be more complicated determining who ranks for businesses that have multiple owners. In general, though, most owners are also "authorized officers."
You'll notice, too, that the terms and conditions of business credit cards typically state that you or your employees must use all of the cards on a business credit card account for business and not personal use. You can use the business card to buy ink for your company's printer. You can't use it to buy spaghetti for tonight's dinner. In reality, it might be difficult for banks to determine whether your purchases are for business or personal use. But it does make sense to use your business credit card only for business matters.
Finally, you can grant your employees access to the line of credit behind your business card. You'd simply provide trusted employees with their own physical cards. Every time these employees use their cards to make a business purchase, the charge reduces your business' available credit.
Business owners must be careful when giving cards to employees. Workers can quickly run up large amounts of debt, but it will be the responsibility of the business owner whose name is on the account to pay down this debt, not the irresponsible employee.
What do banks consider when deciding who qualifies for a business credit card? Jim Salmon, vice president of business services with Navy Federal Credit Union in Vienna, Virginia, said that his financial institution considers the personal financial history of the individuals applying for the card.
This means that entrepreneurs with a history of missing their personal credit-card payments or making late payments to their mortgage lenders could struggle to qualify for a business credit card.
Salmon said that his credit union also considers the type of business that applicants are either starting or running. If applicants have an established business, Navy Federal Credit Union officials will study the balance sheet of these companies.
"We look at a wide range of factors," Salmon says. "When dealing with start-ups, though, we'll take a long look at their personal credit and how they've handled their finances in the past."
It's worth noting that obtaining a business credit card will likely require a personal guarantee, which means you, as an owner or primary shareholder, are typically personally liable for the debt. Likewise, card activity might be reported on your personal credit history and will definitely be reported if you default.
Also of note: A lot of the consumer-friendly aspects of the Credit CARD Act of 2009 don't apply to business lines of credit, so don't expect the same protection in terms of rate increases, which fees a card can charge, how you're billed and when you're expected to pay.
Business credit cards often come with higher credit limits than do personal credit cards. This can be good for business owners and entrepreneurs who need to make large equipment or supply purchases. But these higher credit limits can also lead to financial trouble.
Kurt Fillmore, president of Wealth Trac Financial Group in Southfield, Michigan, said that the larger credit limits of business credit cards can prove too much temptation for entrepreneurs and business owners. Instead of budgeting for major purchases, they'll instead use their business credit cards to fund these buys.
This is especially true when business cards come with enticing introductory offers such as zero percent interest for six months.
But when those six months end? The interest on big equipment and supply purchases can start adding up. Fillmore's advice is simple: Entrepreneurs should use business credit cards -- like all credit cards -- sparingly and only when they know they can quickly pay off the debt they accrue.
"Don't use credit just because you have access to it," Fillmore says. "That's a mistake a lot of business owners make. Only use credit when you need to."
Your credit limit will depend on several factors, said Reinhard. Banks will look at your personal credit report. If you have an established business, they'll look, too, at the revenues of this business, how long it's been operating and how healthy it is.
The rewards programs that come with small business credit card offers are a main selling point for entrepreneurs. Most cards offer either cash-back rewards programs or programs in which purchases allow card holders to earn airline miles or rewards points.
Reinhard said that business owners need to consider the earning structure before applying for a rewards card. Some cards offer the same rebate on all purchases, while others take a tiered approach in which spending in different categories -- gas stations or hotel stays, for example -- might garner a higher percent rebate.
Your credit score
Business owners or entrepreneurs might make the mistake of thinking that misusing their business credit cards will have no impact on their own personal credit scores.
But many financial institutions have policies stating that when cardholders pay late or miss payments on business credit cards, their financial miscues will be reported to the three national credit bureaus. This means that entrepreneurs who skip payments on business credit cards taken out in their names will see their three-digit credit scores fall.
"It can be challenging for entrepreneurs. You are not guaranteed a paycheck every two weeks when you are running a business," Salmon says. "The cash flows in a business can be less predictable. You have to be responsible. You must know that you can pay off this debt. If not, you can get yourself in trouble. You are taking on a financial obligation when you use that card."