According to a 2012 Access to Capital Survey by the National Small Business Association (NSBA), 31% of small business owners with up to 50 employees reported using credit cards to finance their company in the last 12 months to meet capital needs.
A business credit card can provide you with the buying power your business requires and help you track business expenses. It can also help you keep business and personal expenses separate. Business credit cards tend to carry higher annual percentage rates (APRs) than most consumer credit cards, so look for a reasonable rate if you plan to carry a balance.
Business credit cards tend to have higher limits than personal credit cards, while offering business-specific perks and rewards. Many business credit cards reward you for your business purchases in the form of cash back or airline miles. So if you travel a lot for business, it makes sense to sign up for a card that has a flexible travel program with no blackout days or earns frequent flier miles, or gives rewards and discounts at gas stations, hotels, and restaurants.
A recent article in the Entrepreneur advises:
"Use different types of cards for different types of transactions. For example, a business-rewards credit card might be best for everyday expenses, while a zero-interest personal card might be the best for funding."
Also, securing future financing and maintaining good relationships with your business partners and lenders may depend on how strong your company credit score is.
The benefits of a business credit card include:
- Provides buying power
- Helps establish creditworthiness (which can secure future financing)
- Helps with company record-keeping and producing financial reports by itemizing expenses and purchases in detail and by category
- Separates personal and business finances
- Provides rewards and perks tailored specifically to businesses
- Has higher credit limits than many consumer credit cards
- Some cards allow you to set individual credit limits for each employee
The potential pitfalls of having a business credit card may include:
- Increased fees and rates: Business credit cards are exempted from the 2009 CARD Act, so while consumers are protected from certain fees and APR increases, business credit card holders aren't.
- Business credit cards often carry higher APRs.
- Even though personal and business lines of credit will be separate, most institutions will require a personal credit check when you apply for a business credit card.
- If you sign a personal guarantee, and your business can't pay the debt, your personal credit score will be affected since you will be personally liable for that debt.
With some cards, your payment activity is reported to both consumer and business credit reporting agencies. Marco Carbajo, CEO of the Business Credit Insiders Circle, writes in a blog post on the Small Business Administration website that this type of card "helps establish company creditworthiness because it reports to several business credit agencies [...] The downfall is that your company's revolving credit card debt is still reporting on your consumer credit reports, resulting in a negative impact on your personal credit scores."
A May 2011 report by the Pew Research Center, "U.S. Households at Risk From Business Credit Cards," showed these numbers:
- 80% of business cards can change terms – including raising rates on existing balances -- with no right to opt out
- 67% of business cards had penalty rates for late payments or over-limit transactions. The median penalty APR was 29.4%
- 73% of business cards included a late fee (median amount: $39)
- 67% of business cards included an over-limit fee (median amount: $39)
- Median APR on purchases: 13.24% (lowest advertised)/18.12% (highest advertised)
- 41% of business credit cards charge an annual fee (median $67).