Business owners' needs are often distinctly different from consumers' needs, which is why a business credit card can prove to be very beneficial. Instead of making all of your business purchases on your personal credit card, consider using a designated business credit card. Not only can a business credit card help protect your personal credit, but it can help build your business credit and provide more opportunities for your business to grow.
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5 Reasons to Maintain a Business Credit Card Account
1. Separation of Business and Personal Finances
Newbies to the world of business finance are strongly advised to observe this cardinal rule: Never mingle business commerce with private monies. That means have a credit card that is dedicated 100 percent to business use. Accurate financial management is critical to the success of any business, and blending accounts invites massive headaches or worse, a tax return that is difficult or impossible to defend in an audit.
When a business has multiple users who need access to the account, corporate cards have an advantage. Depending on the credit card, the business can add and delete corporate users, set individual spending limits and easily track usage. Also, business credit cards often come with account management software and mobile apps that few, if any, consumer cards offer. For example, some business credit cards allow users to instantly upload and tag the receipt from each purchase.
It is not an overstatement that good reporting tools are critical for accounting and tax purposes. Many great business credit cards allow you to download transaction data directly into your preferred accounting software.
2. Separation of Business and Personal Credit
Issuers might examine both your business and personal credit worthiness before approving you for a business credit card, but it's important to establish standalone business credit to protect your personal finances as well as your business. Business credit expert Chris Bridges, who also runs Credit With Chris, told Forbes the benefits of separating personal and business credit have to do with liability, risk and growth. "When a business owner combines their personal and business credit to obtain financing, it increases their financial liability," said Bridges. In other words, a business owner can be fully responsible for the debt the business incurs on the credit card, which can hurt the business owner's personal credit.
A business that seeks to establish and build a credit history can do so by engaging in business trade transactions. A business credit card alone will not necessarily result in the creation of a business credit file, but correct use can help build credit for a company that already has an established file. Having a designated credit card is particularly important for a business that is incorporated or is an LLC.
3. Perks, Discounts and Rewards
Business credit cards typically offer sign-up bonuses, which are larger than those offered by consumer cards, and bonus points for business-related spending categories. Therefore, while a consumer credit card might award bonus points for grocery store purchases, the business credit card might do so for office supplies, internet service and advertising. Other perks could include hotel discounts, airport lounge access and more.
Related: 7 Weirdest Things You Can Buy With Credit Card Rewards Points
4. Spending Power
Business credit cards often come with higher credit limits than personal credit cards, allowing a small business access to the funds needed to operate and grow. Credit limits vary, based on the account holder’s credit standing.
5. Protection
Credit cards offer a line of defense in case something goes awry with the purchase. Purchase protection, extended warranty and price matching are just some of the credit card safeties that don’t apply to cash purchases.
Using a Consumer Card for the Business
Some freelancers and small business owners prefer to use consumer cards, partly or wholly to retain protections offered by the Credit Card Accountability and Disclosure Act of 2009, also known as the CARD Act. These include advance notice of rate hikes, consumer-friendly payment allocation and protection from over-limit fees. On the downside, the issuer might reserve the right to convert the account to business and withhold consumer card protections if it determines that the card is being used for business purposes. Since every card’s terms are unique, check the terms on the consumer card you’re considering for business use to find out how the issuer feels about it. (Some business credit card issuers voluntarily apply CARD Act protections to business accounts.)
Read: Which Credit Cards Do Oprah, Warren Buffett and Kim Kardashian Use?
Business Credit Card Features to Look For
When it comes time to select a credit card for the business, the most desirable features depend on how the card is expected to be used. The “best” card is different for every user. The following illuminate a few features to consider.
Interest rate. The interest rate is most relevant to users who carry a balance. Ideally, the card should be paid off every month. That way, the interest rate doesn’t matter much. When pay-off is not possible, you must be conscious of the rates on each of the different cards under consideration.
Annual fee. Most business credit card annual fees range from $0 to several hundred dollars per year. As expected, fee-free cards have limited benefits, such as lower cash rebates on purchases. Whether to pay an annual fee depends entirely on the value the card provides. For example, free checked bags, in-flight Wi-Fi and reimbursed in-flight meals could be an attractive inducement, even at a modest annual fee. Many people go for the perks of expensive cards for the value they provide, like airport lounge access, 24/7 concierge service, dedicated customer service representatives, elite status with preferred hotels and airlines, and free upgrades.
Other fees. People who travel outside the U.S. need to watch out for the foreign transaction fee, which is typically around 3 percent for many credit cards. The fee is assessed on every purchase outside the country and can add up fast, but plenty of business credit cards waive it. A balance transfer fee can negate all or a large part of any financial benefit gained from a 0 percent balance transfer. Some cards charge fees for adding users. Bigger companies, or those with higher turnover, might want to look for an issuer that offers free employee cards. Weigh the numbers carefully.
Rewards. A rewards program should match the business’ typical spending habits first and secondly, the redemption preferences of the account owner. Some business cards offer bonus rewards for advertising and software expenses, while others focus on office supply stores or travel. First look at the business’ usual budget and spending habits, then find the card that offers the greatest rewards for that type of spending. When all else is equal, choose the card that has the most flexibility in reward redemption. A welcome bonus is icing on the cake but should not be the primary basis for choosing the card.
Reporting tools. The best business credit cards come with mobile and online account management apps, easy administrative account management and downloadable account data.
Credit reporting. If you’re just starting down the road to business credit, try to obtain a card that reports to business credit reporting agencies. Not all do. You might have to contact the issuer by phone to find out what its reporting policies are and how these policies apply to you.
What to Expect When You Apply
For freelancers, small business owners and other unincorporated businesses, the card issuer will likely require a personal guarantee. That means you’ll apply using your social security number, even if you offer your Federal Employer Identification Number (FEIN) on the application. The application will result in a hard inquiry on your credit and the associated small dip in your credit score. If you provide a DUNS number, some business credit card accounts will report the account to your Dun & Bradstreet business credit file, even if the account was secured on your personal credit standing.
If the business is incorporated or an LLC, the application can be made based on the business' credit standing. Keep in mind, though, that one or more social security number(s) might be required on most applications.
Photo credit: Sean MacEntee