What is a business credit card and how do they work?

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If you’re the typical American consumer, you’ve probably used credit cards to make your financial journey easier. Likewise, if you run your own business, you can use business credit cards to facilitate your business transactions.

What is a business credit card?

A business credit card is a card specifically designed for business owners that offers unique business-friendly benefits. Business cards typically come with higher credit limits, greater rewards potential, and tools to help you manage expenses and employee cards.

As a business owner, you will still need to meet your fixed business expenses, such as rent and utilities, even if your business has cyclical trends (such as snow supply which only sees high demand in winter). You can pull down your business credit card to smooth out these cash flow fluctuations.

Your business credit card could also provide emergency loan financing for the business.

How a business card works

Business credit cards work much the same as personal cards. You charge purchases to your card and then, after the end of each billing cycle, you receive a statement showing your total balance owing and the minimum amount owing.

If you pay your bill in full each month, you will not be charged interest on these purchases. If you choose to carry over a balance, you will start earning interest on your balance. Like personal credit cards, business cards come with different interest rates: the more creditworthy your business, the more likely you are to get a good one.

That said, many business cards are actually charge cards, which require payment in full each month. The main advantage of credit cards is that they usually have no credit limit. While not the best choice for new businesses with high start-up costs that owners are looking to spread over time, or for those with unpredictable income, the lack of a spending limit can make payment cards ideal for established businesses with large monthly expenses factored into the budget.

The benefits of a business credit card

Just like a personal credit card, a business credit card lets you draw on a line of credit. A business’s cash flow can be erratic, but you need money to fund your operations on a regular basis. This is where the line of credit from a business credit card will come in handy.

  • Higher credit limits. These cards are tailored to business needs and generally offer a larger line of credit than the usual consumer credit card.
  • Track business expenses. Business cards allow you to separate your business expenses from your personal expenses, which also helps you keep track of your accounts and prepare your tax returns.
  • Extended interest-free periods. Issuers can offer business owners extended periods of interest-free financing longer than the typical 21-day period for a personal credit card. If your business card offers such a benefit, it will give you a longer grace period to pay off your balance and flexibility to make business investments.
  • Additional travel rewards. Business credit cards could also offer bigger and better rewards. If you travel regularly for business, you could earn more rewards and miles, for one thing.
  • Generous sign-up bonus. Your business credit card might also earn you a better sign-up bonus. And the monthly cashback bonuses could also be bigger. All of this will be extra money that you can reinvest in your business.
  • Employee cards. Another benefit is that you can add employees to your business credit card and give them permissions to perform certain tasks, such as making certain purchases for the company. You can view all of their activities and also earn rewards on employee purchases. And you could set up individual credit limits tailored to their business.

The main disadvantage of a business credit card

If you decide to apply for a business credit card, a major downside to note is that these cards do not benefit from the protections afforded by the Credit Card Accountability and Disclosure Act of 2009 (CARD Act). The CARD Act provides consumers with various protections, such as preventing card issuers from raising interest rates without warning. You will have to decide if the advantages of a business card outweigh this disadvantage.

How a Business Card Impacts Your Credit

To qualify for these cards, your issuer will review your credit history and credit score. Since you are responsible for payments on your business card, this will allow them to assess your creditworthiness. You may need to make a personal guarantee to be responsible for the debt on the card.

In this case, you will be personally responsible for the debt in case the company has trouble repaying the credit card. Considering that the company could also collapse, issuers need to know that someone will be held accountable if that happens.

Issuers might report the debt to corporate credit reporting services, but the debt generally won’t show up on your personal credit report unless there’s a problem.

If you use your business credit card responsibly, you will be rewarded with increased business credit and the ability to tap into larger lines of credit and other business loans to grow your business if that is your goal.

And in case your personal credit is tarnished for any reason, you can still take advantage of the credit to fund your business needs (if your business credit continues to be in good standing).

Apply for a business credit card

When you apply for a business credit card, the issuer will ask you for information about yourself and your business. Be prepared to provide information on the company’s tax identification number, the name of the company and how it is structured. Also have ready the company’s financial data (such as sales and profit figures), when the company was founded and where it was founded, and your personal information, including your identification, address and social security number.

The bottom line

Business credit cards are tailored to business needs and tend to be better for your business than your personal credit card. Their lines of credit are generally larger and they will facilitate your accounting and tax declaration. They can help streamline your business operations and provide rewards that meet your business needs. A big downside is that they don’t have the protections of the CARD Act since that regulation is for consumers and applies to consumer credit cards.

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