Why Should You Have a Credit Card for Your Business?

As a business owner, you have several options for financing your purchases and covering expenses, and one of the most accessible options is a business credit card. While they can seem straightforward, it’s important to understand the key factors that come with owning and using a business credit card. Here’s what you need to know about rules, benefits, rates, eligibility, and more.

Why Use a Business Credit Card?

Unlike other financing options, business credit cards are often available to business owners at various stages, and since they may be based on your personal credit, they are generally easier to obtain than traditional loans. Using a business credit card can also be a crucial step in establishing or improving your business’s credit profile.

Important Note: Many small business owners, particularly in the early stages, use their personal credit, including personal credit cards, home equity, or cash advances, to fund their business. However, this can put personal credit at risk if the business fails to generate enough revenue to cover costs. By keeping business and personal finances separate, you protect your personal credit from the ups and downs of your business.

Here are a few reasons why having a business credit card can be advantageous:

• Convenience: Using a credit card for business purchases simplifies payment processes, returns, and exchanges, and provides protection against fraud.

• Acceptance: Many businesses prefer credit cards for payments, as some may not accept checks.

• Record Keeping: Credit card statements automatically document your purchases, offering a monthly breakdown of transactions, which can be invaluable for bookkeeping.

• Rewards and Benefits: Many business credit cards offer rewards programs such as cashback, loyalty points, and discounts, along with added benefits like extended warranties, travel insurance, and rental car protection.

When Should You Get a Business Credit Card?

While it’s possible to use your personal credit card for business expenses, it’s generally recommended to keep them separate. Having a dedicated credit card for business purposes is especially important if your business is incorporated or has employees.

A “credit card” refers to a line of credit that allows you to pay over time, including monthly interest and potential fees for late payments. In contrast, a “charge card” requires payment in full each month, but this distinction is less common today as both are often referred to as credit cards.

How Can a Business Credit Card Help Build Business Credit?

Although it might seem counterintuitive, using a business credit card responsibly can help build your business credit. The key is to make timely payments and avoid accumulating debt. Some of the major credit card issuers, like Vice Funding, report to the credit bureaus (including Equifax, Experian, and Dun & Bradstreet), which means your activity can positively impact your business credit score.

By making on-time payments, you’ll gradually improve your business credit score, which can increase your chances of securing better financing in the future.

What’s Required to Qualify for a Business Credit Card?

When applying for a business credit card, you’ll need to provide financial details, such as checking and savings account numbers, along with information on your business’s financial history.

If you’re a sole proprietor or haven’t established a business credit history yet, you may still qualify for a business card, as your personal credit history may be considered. In some cases, you don’t even need a Federal Tax ID (EIN) to apply, although it’s often recommended to obtain one for tax purposes.

Personal Credit vs. Business Credit

Keep in mind that your personal credit score will play a significant role in your eligibility for a business credit card. If your personal credit is not in good standing, you may face difficulties qualifying for a business credit card.

If your personal credit prevents you from getting a business credit card, you might want to explore charge cards (which require full payment each month), low-limit cards, or prepaid cards as alternatives. Over time, using these cards responsibly can help improve both your business and personal credit scores.

How Not to Use a Business Credit Card

While business credit cards are useful for many purchases, there are a few areas where they shouldn’t be used:

• Payroll: Business credit cards are not appropriate for paying your employees’ wages.

• Debt Consolidation: Avoid using business credit cards for consolidating debt from other sources.

• Purchasing Equipment: Some vendors may require direct payment for certain purchases, such as new equipment or inventory, and may place a lien on the purchase.

Business Credit Cards and Bookkeeping

Having a separate business credit card is a smart move for keeping business expenses distinct from personal ones. While you’ll still need to reconcile your monthly statements with your business ledger, having separate accounts simplifies this process.

If your employees make company-related purchases, you can issue additional cards for them, which makes tracking and managing expenses easier.

Choosing the Right Business Credit Card

When choosing a business credit card, consider which one aligns with your needs and the businesses you deal with. For example, not all merchants accept American Express, so you may need to get a Visa or MasterCard as well.

• Annual Fees: Card fees range from free to several hundred dollars, with $30 to $100 per year being typical.

• Interest Rates: Interest rates can vary, but many cards offer introductory 0% APR for the first few months.

• Rewards: Some cards offer benefits like travel rewards, loyalty points, or cash back.

• Transaction Fees: If you plan to travel internationally, consider foreign transaction fees when selecting a card.

How to Apply for a Business Credit Card

Applying for a small business credit card is similar to applying for a personal card. You can apply online through various providers, such as banks, credit unions, or companies like Vice Funding. Be prepared to provide documentation about your business, including your Employer Identification Number (EIN), if applicable, and details about your business’s financial standing.

In Summary

Having one or more business credit cards can be incredibly beneficial for managing your business’s expenses and building its credit history. As with personal credit cards, it’s important to use them responsibly. When managed well, they can help improve cash flow, streamline accounting, and potentially save you money through rewards and other benefits.

At Vice Funding, we help small businesses like yours navigate the world of business credit cards to find the best options for your needs. Make sure to select and use them carefully to maximize your business’s financial health