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Business Credit, Finance & Accounting

Using Business Credit Cards to Run a Business


Using Business Credit Cards to Run a Business
Credit cards, just about every individual has one, so it’s pretty likely that every business owner has at least one. Business credit cards are a natural part of everyday business. Technology and convenience have driven up credit card usage and are the main reasons why credit cards are so common. When was the last time you saw someone writing a check or using cash at the store? It doesn’t happen very often, and when it does, you remark on how long it takes! Gone are the days of manually balancing a checkbook and general ledger, there are automated programs to do that!

As a small business owner, you have undoubtedly received hundreds of offers and “pre-approved” applications for a small business credit card. You have probably also thrown most of them away. But, have you stopped to think about whether you should consider getting one or how they differ from other forms of credit? According to the National Small Business Association, over 37% of small business owners reported using credit cards for funding in the past year. Business credit cards are only surpassed (by a few percentage points) as a funding source by revolving lines of credit from a bank. A business credit card can be a convenient way to quickly access financing for short-term needs and can quickly increase your company’s purchasing power – exactly when you need it. However, like any source of financing, it comes at a cost and must be very carefully managed.

Small business credit cards provide business owners with easy access to a revolving line of credit with a set credit limit in order to make purchases and withdraw cash. Just like a personal consumer credit card, a small business credit card carries a variable interest rate and charges if the balance is not paid in full each billing cycle. So maybe you should open a few of those envelopes that come in your mail, one of those cards may be right for you. You also could be able to get a credit card directly through your bank or you can compare cards terms and features and completely apply online. But, before you pass go, stop and consider both the pros and cons.

Business Credit Card Pros
There are a number of varied reasons why a small business owner may consider applying for a small business credit card. If you are able to pay your bills on time every month and not carry over a balance, credit cards can be great convenience and an asset to your business. So why get a credit card for your business?

This is the same reason most people carry a personal credit card, because it is easy! You might be at a store and want to make a purchase that you didn’t plan on. Since most stores no longer let you put it on “your account”, without a credit card you might have to run home and get your business checks, or worse call your office manager and have someone bring the checks to you! Having a credit card lets you get what you want, when you want without having to think about it.

Ease of Qualification
You might be a new business with no credit, or an existing business that has seen a few bumps in the road. In today’s economic climate, not everyone is willing to lend you money or extend you a business line of credit. It can be easier for business owners who do not have a well-established credit history to apply for and qualify for a business credit card. This revolving line of credit with a credit card, is usually a smaller amount and higher interest rate than what you would get with a a traditional line of credit or bank loan. But using your credit card wisely will help you build your credit and eventually qualify for traditional financing.

The world at your fingertips – perhaps your business is an online business, or many of your vendors are online. Sending checks doesn’t really work in the online community. Increasingly, business owners make a large majority of their purchases online and do business online with vendors, contractors and suppliers. Using a credit card makes online transactions with vendors all over the world easier.

Room to move and grow – You probably have had those months where you wish you had an extra thousand dollars or so. Maybe one of your registers broke, and you didn’t have the cash on hand for a new one. Or maybe one of your vendors offered you a smoking deal on some excess inventory but you couldn’t take them up on it. A credit card can provide business owners with a much-needed financial “cushion” when accounts receivable are behind or sales are slow and the business is short on cash. It’s a nice safety net to keep things running smoothly.

Rewards for you and your business – yes, business credit cards, like consumer ones come in many reward flavors. Credit card perks offered to business owners can be better than consumers. Many cards offer business owners rewards for using the card including discounts, airline travel miles and more. Some also provide “cash back” incentives, annually crediting card holders a percentage of their purchases. Whether you want airline miles, hotel points, or cold hard cash credited back – they all are available as rewards to businesses.

Balanced Books
Writing checks and paying cash always throw a wrench into keeping a balanced checkbook. Forget about that one ATM withdrawal you made, and you might see overdraft fees in your future. In addition to receiving a detailed paper monthly statement, most cards provide their small business card holders with online tools to manage their account. They also send out a year end account summary which can help you and your finance team track, categorize and manage expenses. Some cards even automatically integrate with accounting software like Quicken. Having and using a credit card can help simplify bookkeeping and provides a wealth of useful financial information to you and your finance team. If you are also providing credit cards to employees, it offers an easy way to monitor employee spending.

Better Credit
Yes, everyone wants better credit, and small businesses really need it! Showing your financial institution that you can responsibly using a small business credit card will help you reap many rewards. Things like paying the bill on time, paying more than the minimum due, and not going over the credit limit – will be an easy way to build up a positive credit report for your business. That, in turn, will help you be more likely to qualify for a loan or line of credit and at a potentially lower interest rate in the future. All of which mean more money in your pocket!

Business Credit Card Cons
With all the pros, you are probably thinking that there can’t be many cons to having a credit card for your business. While the number of cons may be fewer, the damage that can be done to your business can be greater. Before rushing to apply for a business credit card, it’s important to consider the potential downsides.

You Are Personally Liable
Having a business credit card does come with some legal liability to you. Most small business credit cards require a personal-liability agreement to repay debt. So, misuse of the card, by you or someone in your business can cause harm to your personal credit rating. Anything from a late payment to a non-payment could result in a negative personal credit report and possibly lead to an inability for you to borrow money for personal use. Damage to your credit report may also result in higher interest rates for you on consumer credit cards, or loans.

Money, Money, Money
You guessed it, convenience costs! Nothing in life is free, and the easier it is to use, the more it is going to cost you. The convenience and ease of these cards definitely comes at a price – typically you will be charged an interest rate that is from 1 to 3% over the prime rate. A bank loan or fixed line of credit would be at the prime rate, but are much more difficult to get. Just like your consumer card, interest costs can add up quickly if you don’t repay on time and in full each month. In 2012, the National Small Business Administration found that almost 50% of businesses that used credit cards as a source of financing carried a balance month to month. That is a lot of interest accruing! Having a credit card in your pocket may allow you to spend a little more freely, without a system of checks and balances to your monitor card usage it can be easy to accidentally overextend your company. You may go over the credit limit (very bad) or spend more than you can realistically pay back that month, thus late fees or penalties.

Interest Rates Can Rise – A Lot
If you had a loan or a line of credit, it would be more likely that you could depend on your interest rate being the same for an extended period of time. Even if you had a variable rate loan, you would know when hat change was coming. Business credit cards don’t offer that same security; you unfortunately get fluctuating interest rates. Unlike a loan or fixed line of credit, the company that issues your credit card can reset the interest rate on your credit card depending on how you use and manage your account. Miss a payment? Yes, in addition to fees, your interest rate will most likely rise and not reset!

Your credit card company may not “have your back”. In a perfect world, your credit card company would defend you against bogus claims or charges. Often, small business credit cards do not carry the same generous protection as consumer credit cards. As an example, many cards will not provide the same level of services when disputing billing errors or making merchandise returns, or providing extended warranties. Be sure to review what level of protection and services a card offers before applying.

Potential issues with security exist. As a business owner, you are giving open access to your credit card to a number of people. Business owners need to be mindful, and carefully manage the use of their business credit cards. Beyond the physical card itself, day in and day out many people have access and visibility to your credit card information. Be it the vendor asking you to sign for a delivery, to employees and contractors seeing something they shouldn’t.

Security checks and measures should be created to ensure that cards or card information is not stolen by employees, vendors, contractors and others who come through your office. It is important to monitor credit card usage on a regular basis – you do not want to wait for the monthly bill to come in the mail to find out something is wrong. It is also important to make sure that employees that are authorized to use the card do not use the cards for personal spending, and that they take precautions when making online transactions to avoid being hacked.

So when considering a business credit card for your business, make sure you are educated in the benefits and potential pitfalls that come along with you line of credit. By being aware of what can happen, you will be able to better eliminate or control some credit card issues, and you can eliminate the potential disadvantages and maximize the benefits for your company.

An alternative to a business credit card is Kabbage, who offers advances to grow your business in typically under five minutes. With free sign up and no obligation to take the money, Kabbage is a flexible and fast solution for business owners who don’t want to fund their enterprises with credit cards. You can compare a line of credit versus credit card in the “Compare Funding” section of the site.