Why Your Small Business Needs Its Own Credit Card

COVID-19 has created cash-flow crunches all over the economy, causing many small business owners to re-think their financing needs. If you're one of them, you might consider getting a small business credit card. Occupying a niche between personal (or consumer) credit cards and full-fledged company/corporate credit cards, they are offered by the same, familiar banks and card issuers -- think Capital One, Chase, American Express, Discover -- and operate in much the same way: as a convenient way to get funding for immediate or short-term needs. But they also offer features and perks that could enhance the way you do business, especially if your firm is growing rapidly.

Let's take a look at the pros and cons of this particular type of plastic.

What is a Small Business Credit Card?

Although they're available to enterprises of any size, from sole proprietorships to firms employing hundreds, small business credit cards are specifically aimed at companies with less than $4 million in annual revenue. They give these firms and their owners access to a revolving line of credit, to be used for purchases, expenses, and cash advances. You don't even have to have a formal company or full-time operation set up. As long as you can prove your income comes from a business or via self-employment, you can qualify.

Applying for a small business credit card can be done directly through the card issuer or through your bank/credit union. Typically, they ask you for your business name, Social Security number or employer identification number (EIN), your annual business revenue, the number of employees you have and your years in business. You, as the business owner, are the primary cardholder; but you can also add multiple authorized users (aka your workers), usually at no charge. How many will depend on the specific small business credit card.

Repayment terms for small business cards may differ, depending on the type, though most cards offer the standard 30-day period. As with other credit cards, you're subject to interest charges if you don't pay off your balance in full each month, usually at a variable APR. Most cards have a range of interest rates, roughly comparable to those on consumer cards. Many also carry an annual fee, ranging anywhere from $50 to $595, depending on the issuer. With many cards, annual fees and APRs are waived for the first year.

Although you're applying for a card for your business, the issuer will check your personal credit score and credit history to determine whether you'll be approved -- and what your APR will be. Your credit limit will be based on your business' verifiable gross revenue, and to some extent, on your personal worth. If your business is very new, with little revenue to date, you may be able to use your personal income from the previous year, though that depends on the card issuer.

Personal Credit Cards vs Small Business Cards

As noted above, even one-person operations -- sole proprietors, independent contractors, and other self-employed folks -- can be eligible for small business credit cards. If that's you, how would having a small business card be different from a personal one -- especially since, as the primary cardholder, you're liable for charges and payments?

For one thing, a personal credit card only reports your credit activity to the three major consumer credit bureaus (Experian, Equifax, and TransUnion). A small business credit card may or may not do this, depending on the issuer. But it definitely will report to the commercial credit bureaus (Dun & Bradstreet, Experian Business Credit, and Equifax Small Business). So the business card can be a way to establish a business profile. And if the card issuer does report to the consumer bureaus too, as 67% of them do, it could also boost your personal credit score (but check the fine print of the small business credit card contract).

Next, small business cards typically offer credit limits much higher than those on personal cards, giving you you more spending power at a comparable interest rate. According to Experian, the average credit limit for consumer credit cards is $31,015, while the average small business credit card limit is $56,100.

If you're into earning points and cash back rewards, both personal and small business credit cards have plenty of attractive offers. However, small business credit cards are more likely to offer extra rewards geared towards what companies need: office supplies or online advertising.

Finally, businesses generally can deduct all credit card fees as well as finance charges. Individuals can't.

On the downside: Small business credit cards are not covered by the Credit Card Act of 2009 and other laws that safeguarded cardholders from criminal acts or predatory business practices. Now, most card issuers do extend many of these types of consumer protections to their business cards -- but not all of them. For example, one major requirement of the Credit Card Act is that issuers disclose changes in card terms well in advance, allowing consumers to opt out. That doesn't apply to small business cards, meaning that your issuer can change rates and fees without your knowledge.

Corporate Credit Cards vs Small Business Credit Cards

We noted that small business credit cards occupied a niche between personal cards and full-fledged corporate cards. So how do they compare on the other end, to big brother? If your company has revenues north of $4 million, are you into corporate credit card territory?

Not necessarily. First of all, it's not just a question of revenue. To qualify for a corporate credit card, your business will need to rely on your company's credit rating instead of your personal credit score. That means your company needs to have established business credit history. It also needs to be registered as a S corporation or a C corporation and have a certain number of employees on payroll, plus existing expense policies.

Corporate cards do have larger credit limits -- think hundreds of thousands of dollars -- but often multiple mandates and restrictions. Many cards set minimums: You must have at least 15 cardholders, and generate charges of at least $250,000 annually. Oh, yeah, and you have to pay the bills in full, too -- no carrying a balance.

Regarding those cardholders: A small business card may have multiple authorized users, but it's the primary cardholder (like the business owner) that's ultimately liable for their charges. That means if an employee knowingly racks up a bunch of charges that you haven't authorized, you're still on the hook. In contrast, with a corporate card, it's the company that's responsible for the charges instead of a person.

Plus, if you have a corporate credit card that earns rewards, it's the company that typically gets them. Whereas for small business credit cards, it's the primary cardholder who earns the rewards.

As all this might suggest, it's more difficult to qualify for a corporate card than a small business one. Corporate cards tend to be for established firms -- they're meant to help companies that partake in a large number of transactions and employ dozens of people authorized to spend company funds.

Pros and Cons of Small Business Credit Cards

Before opening a small business credit card, here are some factors to take into consideration.

Pros

• Higher credit limit - Get access to more funds.
• Better money management - Using a small business credit card essentially forces you to separate your personal and professional expenses and costs -- highly helpful in keeping accounts and doing taxes. Many offer bookkeeping perks, like itemized analysis of spending, more detailed expense tracking, and spending reports.
• Targeted rewards - Bonus categories you'll typically find are for categories where your business will do a lot of spending. And if you have multiple users, it's easier to accrue points faster.
• Establish a credit history - If used responsibly, a card can build a good credit history for your firm -- valuable to show lenders or investors when you're seeking serious financing down the road.

Cons

• Fewer protections - Though many business cards voluntarily offer the same types of mandated consumer protections that come with personal credit cards, not all do. That means when things like your APR changes without warning, there's not much you can do about it. Plus, it might mean that you may have a harder time disputing transactions or correcting billing errors.
• Personal liability - Most issuers require a personal guarantee for small business credit cards. That means you'll need to give them your Social Security number when applying for one. You are personally on the hook if your business misses a payment. Plus, negative activity on the business account can drag down your personal credit score.
• Expensive debt - Small business cards tend to be marketed as an alternative to a traditional business line of credit. But the interest rates they carry often tend to be much higher than those on such lines of credit or on business loans offered by banks. Add in late fees and annual fees, and these cards end up being an expensive form of financing -- and, as with personal credit cards, can accrue a mountain of debt very quickly.

Why Should I Get a Small Business Card?

In many cases, using a business card signals to vendors that you're serious about your commercial enterprise. Plus, it helps you build credit for your business in case you need to take out a loan, get cash advances on your accounts receivables (invoice factoring), or seek other financing.

if you plan on or already have employees, or anticipate needing a larger line of credit -- or even investment capital -- down the road, a small business credit card is the way to go. Even if you're a sole proprietor, it's probably a good idea to get a small business card to take advantage of the higher credit limits and rewards earning potential, and the ability to separate your personal and professional finances (often a challenge for the self-employed).

Considering the challenging times we're facing right now, issuers understand that businesses are changing their operations, whether it's because of cash flow challenges or fewer reward redemptions due to travel restrictions. What this means is that many of them are making accommodations from extending deadlines to qualify for signup bonuses to waiving late fees to raising credit limits. Some might even waive the penalty APR or annual fees.

No matter what's going on in the world, though, it pays to have a long-term mindset about using a small business credit card. Consider how using a credit card will both keep your business afloat during trying times and benefit your financial statement in the long run.