What to Know about Small Business Credit Cards

Useful hints on small business credit cards.

There are many business credit cards available for small business owners to choose from. These business credit cards usually come with different features. You can hardly see two business cards that offer the same features. Even if the features seem to be the same, the associated costs, bonus and rewards may be quite different. Therefore, before you settle for a particular business credit card, you need to understand that you are not only looking for a card that can help you make financial transactions; you need to choose the one that will actually benefit your business. With more than one hundred business credit cards to choose from, it may be difficult to decide on which of the cards will actually meet your business needs. However, with the help of some of the business cards comparison websites, they can help you narrow your search to top best small business credit cards. This means that you may not have to waste your time in comparing all available small business credit cards by yourself. Among the popular small business credits cards are American Express business credit cards, Visa business cards and MasterCard business cards. Please note that mere mentioning these credit cards companies here does not constitute any review or our endorsement. It is important you carry out your own review before deciding on which business credit card to select.

You need to understand that business credit cards are not the same with personal credit cards. Although some people use their personal credit cards for business purpose, it is more ideal for you to obtain your business credit card. The reasons for this will be explained later. Before applying for your business credit card, it is important that you note the following:

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Protection: While personal credit cardholders are protected by Credit Card Act of 2009, this Act does not apply to business credit cards. This Credit Card Act was signed into law in 2009 by President Barrack Obama to prevent card companies from charging or hiking the interest rates unduly with just a notice of 15 days. Before this Act was signed into law, hiking of fees by card issuers was the order of the day. With the passage of this law, no card companies can increase their interest rates without giving a notice of at least 45 days. If you use personal credit card, I want to assume that you are familiar to the protections that the Credit Card Act of 2009 provides to consumers. Unfortunately, these protections do not cover business credit cards. This means that business credit cards companies are at the liberty to increase their rates without giving up to 45 day notice. Also, if you have more than one business credit cards balances, the card company can decide to apply your payments to the balance with lower APR. Therefore, before you sign up for any business credit card, it is important you find out from your card issuer their terms and conditions. There are some banks that still believe in fair play and choose to comply with Credit Card Act even though it is not applicable to business credit cards. Such banks will not increase their interest rates without giving their customers a notice of 45 days.

Personal guarantee: It is true that your personal credit history is separated from your business credit history if you are using business credit card. Nevertheless, before you are issued a business credit card, you may need to provide personal guarantee. That means you can be personally held liable for any unpaid business debts. If your business runs into trouble and unable to discharge its card balance, you will be forced to pay off the outstanding balance, the legal structure of the business notwithstanding. Whether the business is established as a sole proprietorship or a limited liability company, once you agreed to personal guarantee, you can excuse yourself from any liability arising from the use of the business credit card. It may even require that you sell your personal property in other to discharge the debt. To make things worse, if it happens that the business file for bankruptcy, you will still be liable for the payment of the outstanding card balance except you equally file for personal bankruptcy. So, one may say that personal guarantee is very risky. Well, that is one out of several challenges small business owners usually encounter. You may be able to reduce the risks involved in personal guarantee if the business is a Partnership. The partners will be individually and jointly responsible for the payment of the card balances if the business is unable to pay. The liability can be shared according to the profit and loss sharing formula agreed in the partnership deed. But if the asset of a partner proved insufficient to clear his portion of the card balances, the other party can be held responsible for the balance. Let me explain this with examples:

Supposing you are a sole owner of a business and have a business credit card with $25,000 balance which the business has been unable to pay. You as the guarantor, you will need to pay the card company from your personal money. But what happens if you don’t have enough money to pay back the card balance? Well, the card company has a legal lien on your personal assets such as motor vehicles, electronics and other valuables like jewelries etc. That is a danger associated with personal guarantee. That is why you need to be careful on how you use your business credit card. If you know you will not be able to pay off the card balance, business credit card may not be appropriate for you as you stand the risk of losing your assets.

Let’s look at the effects personal guarantee will have on partnership. Let’s assume two partners A and B sharing profit and loss loss in the ratio 3:2 respectively signed personal guarantee while applying for business credit card. As a result of harsh business environment which negatively impacted the business, the business is unable to pay the the card balance of $30,000. How will this debt be settled by the partners. If the two partners have sufficient money or assets which they can disposed and turn into money, the card balance will be paid as follows: Partner A will have to pay $18,000 while Partner B pays the $12,000 balance. This is simple and very straight forward. But in a situation when a partner could not pay his own share of the debt, the second partner will be held liable to discharge the outstanding card balance. That is why card companies usually include the clause that partners shall be individually and jointly or severally responsible for the payment of the card balances. This may seem unfair but that is the clause. That is why it is very important that you read and understand the terms and condition guiding any agreement before appending your signature.

Lenders have a general belief that lending to small businesses is risk. Besides the fact that the small businesses may not have much assets which the lenders can fall on in case of default, there is a probability that the business may even fail. For these reasons, card issuers normally request that the small business owners sign personal guarantee any time they are apply for small business cards. So, if you are searching for small business cards that will not require personal guarantee, your search may be endless. That is not to rule out the possibility of getting a business credit card with no personal guarantee, the requirements may be too strict for a small business owner.

Costs: If you are searching for the best credit cards for small business, costs may likely be one of the factors you will like to take into consideration. The best small business card should be cost effective to your business. Because of some benefits and privileges that usually come with business credit cards, they tend to be more expensive than personal credit cards. For instance, the APR of business credit cards is high when compared to that of personal credit cards. If you don’t intend to carry balance on the card, it may no longer be a concern whether the apr is high or not. But in the real business sense, you may need to carry balance on the card. At times, you will need credit to cushion the effect of liquidity gap in your business. That is why you may need to shop for the cards with low apr. If you are looking for cheap business credit cards, you may need to run from the ones that offer many reward packages. With many credit card companies targeting small businesses with their products, you will be able to find small business cards with not too high apr.

Read Also: Why your Credit Card Application Can be Rejected

Security: Credit cards are susceptible to fraud and other security challenges. Credit cards companies also are not relenting in their efforts to ensure that cardholders are adequately protected from cybercrimes. It is important if you are using business credit card that you keep the information about your card safe and intact. Also, you need to be mindful of where and on which website you make purchase. Don’t enter your security information on any website that you don’t trust.

Nevertheless, with all these seemingly disadvantages, business credit cards still offer some benefits that you may not get when using personal credit cards. Let’s quickly discuss the benefits.

Benefits of business credit cards

If you are contemplating on whether to apply for a business credit card or not, the following benefits may motivate you to get one.

It helps you keep your business and personal expenses separately: If you have a business, it is not advisable to muddle up your personal expenses with business expenses. It always helps to separate your personal expenses from business expenses. It makes the preparation of your business account very easy and fast. Your accountant will not have to spend much time trying to sort personal expenses out from business expenses. This can even result in cheaper accountancy fee. Also, for the purpose of tax computation, you will be sure that you are only paying taxes on business related transactions while you can easily deduct all your tax deductible expenses. In addition, you will find it very easy to monitor your cash flow. You know the exact amount your business expends on certain items and what to pay at the end of every month. It will also help you in budget preparation. If you have a good understanding of your expenses, you will be able to forecast the future expenses effortlessly. Having a separate business account is actually a professional way of doing business.

Multiple business credit cards: If you have business credit card, you can actually apply for additional business credit cards for your employees under the same account. With this, your employees will not need to wait for you to give approval before they can buy necessary things they need to keep the business moving. If you are keen about controlling your employees’ spending, business credit cards allow customization for spending limits and where to make purchase.

Higher credit limits: Financing is very crucial to any business. We know how difficult it can be for a small business to access credit facility from banks. As a result of this challenge, many business owners use their personal credit cards to make business purchase. However, the allowed credit limit on personal credit card may not be sufficient for business purposes. If you find yourself in this situation, business credit cards may be the solution. Business credit cards usually provide higher credit limits to business owners. Also, some business credit cards offer longer payment period. However, the interest rates applicable to business credit cards are usually higher too. There are some business credit cards that does not impose credit limits. However, you may need to pay annual fee for such benefits.

Read Also: A Guide on How to Increase Your Credit Limit

Separate credit history: If you need to apply for loan for your business from your local bank in the near future, business credit card can help you establish credit history for your business. Before any financial institution advance loans to your business, one of those things they may like to find out Is the credit history of your business. In fact, this has always been a serious challenge to startups. They usually find it difficult accessing loans from the bank on the ground that they don’t have credit history. If you operate your business credit card very effectively, this can increase your chance of being considered for a loan facility when the need arises.

Source of short term financing: Except you have an established line of credit for your business, you will agree with me that it will take time before you can get your application for loan approved even when you qualify for it. Business credit cards are good sources of short term financing for business owners. Once you obtain your card, you can spend up to your credit limit. The only thing you need to do is to ensure that you make payments before the due date. Defaults in payment can hurt both your personal and business credits.

No collateral: Another interesting thing about business credit cards is that you don’t need to provide any collateral as in the case of traditional bank loan. However, card issuers may require that you provide personal guarantee.

It is convenient: Credit cards provide a convenient way of making payment. Payments of utility bills and other business expenses become easy through the use of business credit cards. If you or your staff have to travel for a business trip, there won’t be need to carry cash. Payment for hotel expenses, car rental and airline tickets is much more easy. Another added benefit is that your purchase can be arranged for you in such a way that will make the accounting easy to do.

Good way to building credit. You can build your business credit through the use of business credit cards the same way you will build personal credit with your personal credit cards. However, I need to mention that you cannot use your business credit card to build your personal credit. But, if you refuse to make payments on your business credit cards at the right time, this can damage your personal credit.

Read Also: How to Get Credit Cards for Bad Credit

Business Credit Cards Comparison

It is pertinent to compare business credit cards before you settle for a particular one. Your choice of card should be based on the values it will add to your business. Business credit cards with different features. In this section, I shall provide a guide on how to compare business credit cards. Below are some of the features you may need to consider:

Annual fee: Some card issuers offers “no annual fee” features to their customers while some charge. Please note that the fact that you did not pay annual fee when you signed up for a business credit card does not mean that you will not pay annual fee in the subsequent years. You need to understand the terms surrounding the card very well. What some card issuers do is to waive the annual fee in the first year. Thereafter, you will be required to pay the annual fee. For example, a card company may offer $0 intro for first year. You need to pay close attention to how much you will be paying thereafter. In some cases, the $0 intro for first year may be a bait.

Interest rate: You may be presented with ranges of interest rates. The business credit card company offering the least interest rate may not necessarily be the best card issuer for you. You need to examine whether your volume of transactions will qualify you for the interest rate. If you look critically, you may discover that it the highest band of the interest rate that will apply to your own situation.

Foreign transaction fee: If your business requires that you or your employees travel very frequently to foreign countries, you may need to check how much you will be charged as foreign transaction fee. Of course, with your credit card, you may not need to bother about how you are going to get your local currency into the currency of the country you are visiting. When you use your card, the conversion is done seamlessly. And you can even get it done at affordable exchange rate. But, each time, there is a conversion like that, their is a cost involved. The customers may be requested to pay for this cost or the card company may decide to bear it. Due to ever increasing competition in card business, there are many card companies offering no foreign transaction fee. I think it will be worthy if you can take advantage of this if you know you or your staff may need to travel regularly.

Read Also:Essential Features to Consider in Travel Credit Cards

Grace period: If your business is still struggling with liquidity challenge, you may need to consider the grace period your card issuer is offering you. If your business experiences irregular cash flow, having a lengthy grace period can help you gather yourself and ensure that you meet the deadline for your payment.

Special rewards programs: Business credit cards companies usually offer special rewards programs to promote their products. These rewards may include bonus or cash back, travels and gift cards. For you to qualify for these rewards, you will need to meet certain criteria. For example, a card issuer may offer $250 cash back on the condition that you spend $30,000 within the first six months. If you are not a heavy spender, cash back may not be a justification for you to choose a particular business credit card.

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