Have you’ve ever considered using a credit card for your small business? If you have, you probably might be wondering when should be a good time for you to get one. While the answer can vary on your reasons the optimal time would generally be soon as you launch your business. Now when we say credit cards, we’re specifically talking about business credit cards. Much like their personal counterparts, they come their own advantages and drawbacks.
Why should business owners consider getting a business credit card in the first place? As you know, running a business comes with numerous challenges, among them includes securing financing for business operations. Using a business credit card is like taking a small loan with a credit limit to make purchases and withdrawals. Business credit cards can help businesses get good credit which opens the door for different perks. This can come in handy when applying for funding or when seeking favorable terms from suppliers and vendors. To better understand their strengths and weakness, here are a few things business owners should know about business credit cards.
Quick Funding Solution
When you need funding for your small business sometimes getting a business loan isn’t always feasible. Business credit cards allows users to acquire funding through a process similar to a line of credit which is much quicker then a loan. The credit limit for most small business credit cards on average is around $56,100 with certain exceptions going up $100,000. Because of its funding limit, business credit cards are best used for immediate minor expenses like equipment, supplies or inventory.
Business credit cards can help small business owners keep track of important records. For most cards when you sign up, a list of all your financial transactions is digitally recorded. This can be beneficial for businesses conducting important operational tasks such as bookkeeping. This also comes in handy for other activities like filing taxes and applying for business loans. Having the ability to access your business’s spending records anytime can also speed up financial transactions too. Since the records are well-organized and kept online, finding the right information for certain transactions has never been more convenient.
Just like personal credit cards, business credit cards come with their own rewards too. Among them includes cash-backs, sign up bonuses, points rewards and a discount on travel expenses like hotel stays and airline tickets. You could also earn discounts on shopping expenses from business supply outlets. Taking advantage of these rewards can help you significantly cut your business expenses over time. While business credit cards typically have high APRs some cards offer 0% intro APR. This means you won’t be charged interest on your purchases for a certain period of time. Of course the terms and conditions varies by issuer.
To qualify for a business credit card, most issuers will require a personal guarantee. In many cases, this means providing them your social security number and previous records of your credit history. Like regular credit cards, not paying your business credit card on time could affect your business’s credit rating. This could also put your personal credit rating at risk since credit companies report your business activity on it too. A poor credit rating can also prevent you from borrowing money from lenders which could hold your business back financially. Whether you have a credit card or not, your business’s financial health should always be a top priority.
As financially convenient business credit cards can be, they can also be quite expensive. On top of high interest rates, business credit cards also charge late fees and, in most cases, high annual fees. Business credit cards charge higher interest rates compared to personal credit cards and other forms of financing. In fact, when compared to a business loan or fixed line of credit from a bank, the interest rates for a typical business card is much higher (1-3% over prime). And when those rates are not repaid on time, they can add up very quickly. Always carefully monitor your card usage so you don’t accidentally overextend your business financially. Some helpful tips can be found here.
Another downside that comes with having a business credit card is the lack of protection. This makes it difficult for owners to correct billing errors, return purchased items or reverse fraudulent transactions. When you use a personal credit card, most credit companies offer purchase protection through The Credit Card Act of 2009. In this case, using a personal credit card to fund or make purchases for your business can be more practical. Even if the card is used for your business, The Credit Act will still provide protection when the business is carrying the balance. When applying for a card, it’s best that you review the level of service and protection a card offers first. While not required, some issuers can voluntarily extend the same protection found in consumer cards to business cards.
Business credit cards can be a very valuable tool business owners could use to build credit. But if one isn’t careful, it could also be a self destructive device for your business financially. When choosing a card, it’s important that you thoroughly analyze your business needs and spending patterns. Rewards, annual fees and bookkeeping tools are all important factors to look into when choosing a card. By learning the basics about business credit cards and using them carefully, you can avoid certain pitfalls while reaping rewards. You can find more information on applying for business credit cards from leading online resources like this article from Nerdwallet.