One vital key to growing a successful new startup or other small business is easy access to funding for the future, and a business credit card fills the bill.
Yet the word hasn’t quite gotten out.
Small business owners are just as likely to use their consumer credit card for business purchases as they would a card intended for that purpose, says a report from the small-business advocacy firm Nav.
Nevertheless, developing a distinct business credit history is just one of the lasting benefits such a card can bring.
Additionally, a dedicated business credit card is one of the fastest growing financial vehicles for small businesses and startups, according to market research firm Statista.
In the company’s chart below, small business credit cards were second only to actual lines of credit for companies seeking credit cash as recently as 2018.
We connected with representatives from American Express, Mastercard, and Visa as well as Nav to sketch out 8 reasons a business credit card, prudently handled, can grow your business and reduce entanglements between both your business and personal life.
Enjoy More of the Same Perks You Get Now
Traditional consumer credit cards might initially seem to offer similar benefits to their business-oriented siblings.
Cash back, redeemable points, and airline miles are common rewards, and some cards award extra points for purchases in specific categories, such as groceries, gas stations, and online shopping.
Business credit cards take this further with categories better aligned to business needs, including deals on digital marketing services and online advertising, office supplies, and entertainment.
But your real first priority is walling off your business’s finances from your household balance sheet.
“One scenario I have seen, time and time again talking with small business owners, is that they use their personal credit card for their business,” said Gerri Detweiler, Nav’s head of market education.
This can have adverse effects down the line, says Detweiler, with credit card holders winding up with balances that can bring down their personal credit score, which could make it more difficult to get other types of financing later.
Step Up to Benefits Better Suited to Business
Small to midsized business (SMB) credit card owners spend, on average, 2.4 times what consumer credit cardholders do, according to Visa Small Business Insights.
So financial institutions compete for your dollars with goodies such as low (or no) annual fees, no-fee foreign transactions, and free employee cards.
More importantly, however, card issuers offer more of what most small businesses lack: day-to-day help.
“Small-business owners lack a lot of resources,” said Ginger Siegel, North America small business lead for Mastercard.
“Unlike larger companies, they normally don’t have a chief financial officer, risk officer, [or] technology officer.
They need as much help as they can get to focus on their business.”
A business credit card can help in several ways, but an important one is how they can help with expense tracking and management.
Other potential benefits include discounts off important software purchases like small business accounting (where the card’s transactions automatically show up in-system) or tax preparation.
Such benefits are available from all the major providers, including American Express, Mastercard, and Visa.
The reason you should look carefully and often is that the list of available discounts and rebates relevant to small business changes regularly.
“We see this as an immense opportunity to continue to innovate our existing products and create new ones that match the ever-changing needs of small-business owners,” said Courtney Kelso, senior vice president and general manager of U.S.
commercial card products at American Express.
Grow Your Business Credit Rating
As with personal credit, business credit scores tell prospective lenders how much of a risk you are, which could ease (or stall) financing when you need it.
A high credit score, says Nav, can help you pay less interest on loans, reduce how much you might have to pay up front for purchases, and help you make better long-term deals with suppliers.
Whether you’re getting your card from Appleor American Express and regardless of whether it’s business or personal, you build these scores the same way: by using the card regularly, paying bills on time or, even better, early—and keeping balances low.
Your business credit score is a separate measurement from your personal score, which is why you need to pay attention to both scores.
While issuers of most business credit cards won’t report results so they have a negative effect on your personal credit score (unless you default), others might report lesser infractions like paying a day or two late.
Make sure to track this down in the fine print before you sign up.
The last thing you need when you’re applying for personal credit, say for a mortgage or new car, is to be turned down because you’ve been lax with your business credit account.
Reach Your Financial Goals At Low Rates
Credit card interest rates in the teens might not entice a budget-stressed, fledgling business, but the alternatives might surprise you.
Consider, for instance, that if you obtain financing from Amazon or PayPalas a seller, the terms are less transparent than credit card issuers, by law, must be.
“They’re doing a lot of lending, but they don’t seem to disclose an interest rate,” said Detweiler.
“So when you actually do the calculation and compare it to an APR, translated to an APR, it can be 25% or 30%.
Compare that to maybe a 16% or 18% interest rate on your business credit card, and you’re coming out well ahead.”
Simplify Your Taxes at Year's End
For a business based at home, expenses for local travel, groceries, and supplies can easily blur the line between personal and business.
But you can avoid this by using your business and consumer credit business credit cards specifically for those expenses.
It makes record keeping much easier.
And if you pay an annual fee for a card you use 100% for business, it’s among the many write-offs you can exploit on your business taxes.
Keeping personal and business records separate can also keep you out of trouble should the IRS call you in for an audit.
The more your expenses are blurred, the greater the possibility that you will deduct a personal expense, without meaning to, on your business taxes.
Get Help Managing Cash Flow
Getting credit when you need it is essential to cash flow, but even if your personal card account’s balance is rising, it could limit how much your business can borrow.
That’s because your personal FICO score, a measure of consumer credit risk, is influenced by debt usage, which compares your balance to your credit limit.
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“If that starts creeping up, it can negatively impact your personal credit score,” says Detweiler, noting how easily this can happen to businesses that invoiceimmediately but then aren’t paid right away for their services.
“A credit card, even if you’re not paying interest, gives you some time to pay for purchases while you’re waiting to get paid.”
“The financial institutions I work with want to do the best they can to help small businesses facilitate their cash flow,” added Mastercard’s Siegel.
“Because when small businesses fail, 80% of them fail due to cash-flow issues.”
Set Spending Permissions by Employee
Specifying who can charge what and when isn’t for business partners; it’s for those you trust less.
That sounds like a difficult and even awkward thing to manage for small businesses, but with a business credit card, it doesn’t have to be.
“The vast majority of financial institutions can control access down to the card number,” said Kevin Phalen, Head of Global Business Solutions at Visa.
The business card holder can typically set permissions not only to type of purchase or a specific business but also to dollar amounts, time of day, and other criteria.
Some employees using a business credit account, in fact, won’t even see the card or its number.
“In some cases businesses are deploying ‘virtual cards,’ for infrequent users, that are provisioned into the employees’ mobile devices so they can go make specific purchases,” said Phalen.
“It’s an easy way for that small business to manage their cash flow, their expenses, and fraud liability as well.”
Enjoy a Lasting Business Presence
Finally, opening a business credit account, fully separating its use from personal expenses, and making prompt payments without fail are important steps toward planting a flag that you’re open for business.
But don’t stop there, advises Nav.
Other important steps include setting up a business phone number (and making sure to market that information in collateral and advertising), opening up a business bank account in your official business name, and opening a business credit file with one of the major business credit reporting agencies: Dun & Bradstreet, Experian Business, and Equifax Small Business.
That’ll mean getting a federal Tax Identification Number, or EIN, to open the bank account.
This is free, and you’ll be glad you have it if you have employees or later decide to incorporate your business.
Have any questions you need answered about managing small business credit cards? Subscribe to Daxdi's Small Business Newsletter and join the [email protected] business community on LinkedIn, and you can ask vendors, other professionals like yourself, and Daxdi's editors.
