There are advantages to having a separate credit card solely for business purposes. Business credit cards enable you to make big buys like studio furniture, equipment, or raw materials. However, every business proprietor should know that business cards work differently than personal credit cards. Liability protections, eligibility, and rewards can vary from card to card, and not all individual consumer protections extend to businesses.
A business doesn’t have to be registered or incorporated to apply for this type of credit card. Their use has grown in recent decades.
- In 2019, 53% of businesses reported using credit cards as an external funding source.
- A total of 80% of companies expected to face financial difficulty in the next 12 months, and 32% cited credit availability as a pain point.
- In 2020, 21% of companies sought funding via the use of business credit cards.
Availability and Accessibility
Most financial institutions use an applicant’s credit score when evaluating an application for a business credit card. Furthermore, income from various sources might be needed to qualify, which implies these cards may be available to newly founded businesses. Note, some credit-card financial institutions do not report business account activity to the owner’s credit or only do so if the account is unsettled. In these cases, the owner’s credit activity is disjoined from the business’s activity.
Business credit cards are accessible to businesses of all dimensions. You can’t approach a bank for finances to handle business expenditures such as travel or purchases to boost the business or a product’s brand market horizon. Instead, you can use a business credit card and get a window to repay the deficit for such a scenario. You should use business credit cards to establish a credit profile for forthcoming financing like a business loan. Building a credit history in your business’ name helps you apply for business loans and makes it easier to get approved for higher credit-card limits
Most monetary institutions grant business credit cards with multiple advantages like cash-back on business spending, reward points on spending a specific target amount, and others. Credit cards can also make it easy for you and your employees to pay when traveling within the country or abroad for business.
While seeking a business credit card, you may fixate on the rate of interest that applies if you don’t pay off the balance. There are some other factors to consider too. For example, most bankers offer an interest-free period on their credit cards, meaning you’ll only pay interest for the outstanding amount if you exceed the given time frame—usually 45 days, but some allow up to 90 days.
Do You Need a Business Credit Card?
Small-business proprietors need to analyze their finances and control cash flow, especially in the early years of operation. Using a business credit card is one way to purchase essential equipment for your pottery studio without delaying required payment for long-term essentials, like financing a business or making gigantic purchases that you won’t be able to repay in a few months. Based on 2020 data from Experian (an American–Irish multinational consumer credit reporting company), the average small business credit card limit was $56,100.
In Need of Quick Funding?
Let’s say you started a production pottery studio and you receive a bulk order that requires more mugs than your current stock. If you want to fulfill the order, you’ll need extra funds to purchase materials such as clay and glaze.
Getting a business credit card is a rapid process. You could go through your local bank for a small business loan—but since it takes several weeks to months to get approved, you won’t get the money in time to complete the order. If you need the funding fast, a credit card might be the best way to get the order done on time and potentially gain a repeat customer, or least a good review.
Here, purchasing the additional materials with a business credit cards makes sense since its a relatively low-cost purchase and the funds from the mugs’ sale will cover the statement balance.
Classifications of Business Credit Cards
You can choose a business card as per the needs of your studio and your preferences. Options typically include:
- Travel cards: If you prefer accumulating points and miles that you can use to pay for business or personal trips, several cards offer flat-rate or tiered rewards, often with large sign-up bonuses.
- Cash-back cards: Suppose you’re interested in gaining cash-back rewards that you can direct back into your business or use for personal expenses. In that case, some cards offer a flat rewards rate or a tiered rewards system that offers bonus rewards on specific spending categories.
- Secured cards: Business credit card applications usually require a personal credit check. If your credit is poor, the only option may be a secured business credit card. These cards require an upfront security deposit, typically equal to your credit limit, but can still be instrumental in helping build up your credit history.
- Zero-percent APR cards: While zero-annual-percentage-rate credit cards are less common among business credit cards than personal ones, there are many solid options. These can come in handy if you have many expenses, but not enough revenue to pay them off immediately.
If you’re thinking about getting a business credit card, shop around and consider your options to determine the right one for your studio practice.
Managing Small-Business Credit Cards
Most financial institutions with small-business credit cards offer zero interest only if you maintain a zero balance each month. Once the business card starts to carry a balance, you start yielding interest. This also makes it more challenging to pay down the balance next month, which can lead your business to a slippery slope of rising credit-card debt.
1. Make payments on time: Skipping the payment due date will initiate a delinquent fee in addition to the interest. On top of that, it will risk your interest rate going up and will lower your credit. So, be systematic and pay on time.
2. Do not use it as a personal credit card: It may be tempting to use your business credit card for personal purchases. Blending business and personal accounts can negatively impact contracts and grants, traverse ethical boundaries, and cause tax reporting to be challenging. In some cases, it may even be against the law.
3. Keep it protected: When not in use, keep your small-business credit card in a secure location to avoid credit-card fraud. Don’t make it easy for others in your office space to access the credit card without explicit permission, and make sure they promptly return it.
If you have employees who require a credit card for work, the best practice is to provide each person with an individual card. That way, you can precisely track all usage or any potential misusage. Be smart.
4. Guideline for using cash vs. credit: To avoid overspending on your credit card, start with a defined strategy for when it is appropriate to use it. You don’t always need to use your credit card, a business checking account or cash are also options. Determine what will work for your business, and establish an understanding of the rules for you and your staff. Given the risks associated with mismanaging credit cards and out-of-control business debt, creating these parameters is worth considering.
5. Review your monthly statement: Statement review can be tiresome, and business owners can easily bypass it. Nevertheless, a statement review is one of the best ways to catch fraudulent charges. If you allow others in your business to borrow the credit card, then it’s a must. Go a step further: Reconcile your receipts with your statement, and file them together. This will help you stay organized for tax time.
6. Maintain purchase/travel receipts: Your credit card statement alone isn’t sufficient backup for tax purposes. Retain your receipts. File them so that they’re convenient when it’s time to reconcile your statement.
7. Don’t overspend: Finally, the most critical best practice is simple in theory, but often tricky: don’t overspend.
To avoid overspending is to know your limits, which means creating a budget and sticking to it. To stay on top of your limitations, run quarterly cash-flow projections, and monitor your revenue against your predictions. This way, you can safely keep your finances in the black while controlling your credit-card payments.
Mamta Gholap earned her MBA in finance and is passionate about handbuilding with clay.