To grow your business, it’s important to build credit for your business. Sure, to start a business, you’ll need to use your personal credit and maybe the credit of other owners or investors.
But over time, you want to wean off your personal credit so you’re not continuously putting your own credit on the line. As your business expands, it should stand on its own feet and build credit that eclipses your personal credit.
In this article, you’ll learn:
- the reasons to use a business credit card
- the differences between using a business credit card and a personal credit card
- should you use a personal or business credit card for your business
Why use a business credit card?
There are various benefits of using a business credit card, like:
- Expanding your overall access to credit: Businesses exist to profit their owners and as they ramp revenues, can become way more creditworthy than the individuals who started the business. Personal credit kind of maxes out at a certain point but businesses, because their revenues can far exceed our personal incomes, can continue to grow their creditworthiness.
- Business credit cards build business credit: If establishing strong cashflow is your objective as a small business owner, access to financing can be super important. Paying your bills on time helps to build credit history, but so does using a business credit card. Make sure the business credit card you use reports to the credit bureaus on your business file, not just your personal credit.
- Keeps personal finances separate from business finances: Corporate formation can shield the individual owners of the entity from personal liability. If you start comingling personal finances and business finances, you can possibly lose some of that protection that a corporation provides and become personally liable.
- Easier to get than a credit line or loan: It’s a challenge for a young business, without a strong history of revenues and credit, to establish its own credit. It really takes a few years to find your footing. Along the way, it’s hard to get financing without strong business credit. It’s frequently easier to qualify for a business credit card than it is for another form of financing, like a line of credit or loan.
- They’re convenient: Whoever designed the credit card was a genius. Almost all suppliers and vendors accept them. It takes just a few seconds to swipe the card and make the transaction. Credit cards > writing checks, no?
- Get rewards: There’s also a monetary value to using a credit card. Credit card companies compete for your business and provide all kinds of rewards and perks to get you to use your credit card, like airline mileage, hotel points, and cash back.
- Statements designed for tax reporting: Credit cards designed for businesses generally make it easy for businesses to track their spending and report their spending when it comes to filing taxes.
The differences between business credit cards and personal credit cards
On the outside, the differences between a business credit card and a personal credit card are minimal. They work the same way — you swipe it, pay for things, pay your bills, and get reported to credit reporting agencies, like Dun and Bradstreet.
You grow your points, rewards, and cash back. You get insurance on some of the products you buy.
But, when you read the fine print, there are some structural differences between the two products.
Businesses have less protection than consumers from credit cards
n the fall out of the Great Recession and credit crunch of 2007-2008, the Credit CARD Act of 2009[pdf] was enacted by the Obama Administration in the U.S. The new regulation required credit cards companies to give their customers enough time to pay their bills (at least 21 days from the time the bill is mailed). Credit card companies must give customers 45 days notice if their rates are about to go up and apply payments to customers’ highest interest balances.
Swift changes are allowed with a business credit card
None of this applies to businesses. According to a recent study, 80 percent of business credit cards could theoretically change the terms of their credit card agreements overnight. This leaves businesses potentially exposed — so much so, that recommendations have been made to include businesses under the Credit CARD Act of 2009.
Due dates and APRs can change overnight
So, this means that a business owner can wake up in the morning to learn that the due date on its most recent credit card bill has changed. It also means that a credit card company can immediately jack up your interest rate on your entire balance (they can’t do that to consumers).
Here is the fine print on the payment terms for Chase’s Ink Business Preferred card. You can see that the APR would go up to 29.99% — from 25.99% — if you’re late on a minimum payment and that rate would last throughout the life of the card.
Not mandatory business protections but some cards voluntarily adopt them
Even though businesses weren’t included in protections described in the Credit CARD Act of 2009, that hasn’t stopped some credit card companies from voluntarily adopting some of the same provisions described to protect individuals. Some cards claim that they won’t change a due date or won’t raise your APRs without giving an advance warning. The point here though is that these are voluntary — credit card companies don’t have to do any of this legally.
For example, American Express generally offers a 21-day period between the statement date and payment due date and the same payment due date each month.
Employee credit cards can impact the credit of the employee
One of the benefits of using a business credit card — for incorporating, in general — is to protect an individual’s credit by using a business’ own credit. That’s not always the case for employees. Many businesses will issue their employees business cards as part of what’s called an individual liability account.
So, even if the business is expected to make payments on the employee’s card, the individual would take a credit hit if for some reason the business was late or failed to make its payments. So, even though an employee may use a corporate credit card, she would expose her personal credit just like using a personal credit card.
Joint liability accounts place shared responsibility on the business and the employee.
Corporate credit card policy statements generally describe who bears the responsibility, so review that or ask an HR person, your boss, or the owner of the business. An individual can check if their business card is showing up on his personal credit report by getting a free credit report at AnnualCreditReport.com
Should I get a personal credit card or business credit card for my business?
It’s not a simple question.
Out of necessity, you’ll probably have to start with a personal credit card or business credit card that uses your personal credit to start. That’s why it’s important to immediately start building your business’ own credit — so that you can qualify for a business credit card using only your business’ credit.
Long term, you’re going to want to use a business credit card, even though they have drawbacks when it comes to the lack of protection provisions they have compared to personal credit cards. The benefits of using a business credit card — limiting your personal liability, more financing options, larger credit lines — do outweigh the cons.
Do your research. Grow your business.