Small Business Credit Cards
Business credit cards are a readily available form of capital that most small business owners can easily access. For business owners who do not have well-established credit, credit cards may be easier to qualify for than a business line of credit or a bank loan. Business credit cards provide owners with a revolving line of credit that is not on a fixed timeline. However, the interest rates for a business credit card are often significantly higher than they are for a business line of credit or loan. For many, the benefits outweigh the costs:
According to the National Small Business Association’s 2016 Year-End Economic Report (conducted Jan. 16 through Feb. 8, 2017 among 1,426 small-business owners), 32% of small businesses were getting their financing from credit cards in January 2017, more than almost all other types of funding:
- 2% from online/non-bank lender
- 1% from crowdfunding
- 49% from a bank loan (large, community, credit union)
- 3% from an SBA Loan
Since credit cards are clearly a preferred method of financing for many small business owners, let’s explore the benefits and dangers of this type of funding.
Benefits of Small Business Credit Cards
Credit cards, whether personal or business, can be risky. You’ll always run the risk of charging more than you can pay off, but when you use a business credit card wisely, it can be a convenient and flexible source of funding. Business credit cards help you keep your business and personal expenses separate, which will come in handy at tax time. They also usually have higher limits than personal credit cards, allowing you to make big purchases for your business that you otherwise might need a small loan for. Business credit cards can also have lower interest rates than personal credit cards and allow you to add employee cards with preset limits. Some business credit cards offer companies incentives, like discounts on office supplies or discounts for paying early.
Business credit cards allow you to pay for things when you need them, instead of trying to get a loan, crowdfund or apply for grants. Of course, this type of funding has its drawbacks as well. Don’t ignore the dangers of using business credit cards.
Dangers of Small Business Credit Cards
While for many small business owners the benefits of business credit cards outweigh the cost, you should still be aware of the dangers before you start charging. Business credit cards often require a personal guarantee, which means even though charges will be in your company’s name, if you can’t pay your bills, your personal assets could be at risk. Business credit cards also aren’t subject to the same rules as personal credit cards, which means you could have less protection against rate increases, over-limit fees and more.
A high credit card limit and a growing business can spell danger, so make sure you consider the downsides of business credit cards before you get one for your business. Another con of business credit cards is that they may not help you build business credit with bureaus like Dun & Bradstreet. Learn more about why this can be a negative for your business below.
Business Credit & Small Business Credit Cards
Business credit is your company’s perceived ability to make good on the terms of its contracts, but contrary to popular belief, business credit cards may not help you build business credit the way personal credit cards can help you build your personal credit. Credit card companies are not acceptable trade references for credit reporting agencies like Dun & Bradstreet. Even if you are paying on time or early, those payment experiences may not be reflected on your business credit file.
To start building business credit, you’ll need to get a D&B D-U-N-S® Number, which establishes your business credit file. Then you can add your company information and any acceptable trade references to help generate your scores and ratings. Once your file is generating scores and ratings, you’ll want to keep a close eye on it; Monitoring your file can help you manage cash flow and risk, prevent bad debt, catch fraud and more. Learn more about business credit, or get started building your business credit file.
Photo Credit: justin_02, Twenty20