What You Need to Know About Business Credit Cards

Capital One, Chase, American Express – these are all credit cards on the market. You can use them for your personal finances, but you can also use them for your business finances. 

What Is a Business Credit Card?

To go back to the basics, a credit card itself gives you a credit limit, usually based on your credit history, and you’re able to spend any amount up to that limit. By using a credit card, you don’t spend your actual money until you go to pay it off, usually monthly. The amount you spend, however, acquires interest. Most business credit cards currently have an average interest rate of around 18.31%, according to  Wallet Hub. 

As for the business side of having a credit card, this gives you the ability to separate personal and business finances. It also gives your business a way to use credit for short-term expenses. If you have employees who regularly do work outside the business, take clients to lunch, or do handy work, having a business card can eliminate the need to compensate them for spending their personal money, making things easier as a business owner.

Why Do You Need a Business Credit Card?

Getting a business credit card can help build a profile and improve your chances of getting credit or loans in the future, along with helping you to get better borrowing terms. Just like a personal credit card, you can use it to buy short-term needs or provide a cushion for emergencies. It’s also usually a good idea to keep your business and personal finances separate, so using a company credit card is ideal if you want to separate the two for tax and legal purposes. This way, you don’t mix up your business debt with your personal ones, and you can keep organized.

And, as mentioned before, if you’re going to be doing a lot of client meetings or relying on employees to buy supplies, giving them a business credit card can save time and paperwork. If you own a small restaurant but rely on a manager to keep the place running, giving that manager access to a business card to make purchases on behalf of the business makes operations easier. If a light fixture needs replacing, or a window needs repair, having a business card can cover those costs all while making their purchase simpler. 

How Do You Get One?

Most lending institutions offer business credit cards, and the process is similar to the application for a personal credit card. Sometimes, you’ll have to back the business credit card with a personal guarantee, which is similar to a guarantor agreement or a collateral agreement. This will hold the individual applying for the card liable if the business defaults on payments, and could affect your personal credit score if that’s the case.  

You can get a business credit card using your personal Social Security number if your business doesn’t yet have an employer identification number. Card issuers will underwrite the application using the same process as they would for a personal credit card application.

As with most credit cards, they’ll have higher interest rates than other types of borrowing. Lines of credit will have lower interest rates but are very similar to credit cards. Definitely explore your options if you have a different type of spending in mind.

Which Business Credit Card Should You Get?

The type of card you should get depends on your business needs, your credit history, and several other factors. Your best options will vary, but Nerd Wallet’s top four business credit card recommendations are American Express’s SimplyCash Plus, Capital One’s Spark Cash for Business, Chase’s Ink Business Preferred and American Express’s Blue Business Plus.

These are just suggestions, and your best options will vary depending on the factors mentioned above. 

Keep In Mind

Every business should probably have some sort of business credit card, but remember that it’s suited best for certain kinds of purchases. Credit cards have higher interest rates than other forms of debt, so they should usually only be used for small purchases. Lines of credit are another good option that’s very similar to a credit card but with lower interest rates. They aren’t as easy to qualify for, but can provide a good working capital cushion if that’s what your business needs. 

Business credit cards are great ways to build credit, however. If you have a newer company and want to qualify for loans in the future, a credit card is an easy way to use small purchases to build credit. 

Never use a credit card for what a loan should be used for. If you’re looking to invest in a large purchase, such as for equipment or real estate, consider a business loan like a term loan or an SBA loan.  

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Why Is Your Business Credit Important?

Building business credit is like building trust. The more of a clean track-record you have with paying debts, the more likely you are to be trusted in the future with them. Think of it as a resume – if a resume exemplifies how well you’ve performed at previous jobs, your credit is a history of your finances, and how well you’ve paid off debts. Your lenders are your references, and they keep a trail of how well you’ve repaid them. They then report that history to compile a credit score. If you perform well at a job, it builds your resume. If you don’t, then not so much. If you have a good resume and you have a good track record with your employers, you’re more likely to get more interviews and job offers – credit works the same way. When used responsibly, it will get you approved for more – and better – loans.

Why is establishing business credit so important? It can deeply affect your potential to get funding. In an article published by the Small Business Administration, they cite that the Nav American Dream Gap Survey revealed in their 2015 study that 45% of small business owners did not know they have a business credit score, 72% didn’t know where to find information on it, and 82% didn’t know how to interpret it. This narrates exactly why learning about and establishing your business credit is so important.

Many business owners don’t understand their credit health, and it can in-turn affect the financial health of their business. Here’s our take on why business credit is so important.

Growth

Along with providing a service to your customers, growth is usually one of the top long-term goals of a business. Building business credit is important because it helps prepare your business for the future. If you want your business to grow, you have to first establish some sort of credit. Business credit is used to determine if your business is qualified for different financial products. The more credit you have, and the better that credit is, the more purchasing power you have. Your purchasing power is exactly how much you have to invest in new assets, and if you maintain good credit, it runs parallel with your company’s growth.

Business credit also increases your chances of getting financed with favorable terms. If you build your credit, you’ll receive loan amounts, interest rates and term-lengths based on it. The higher your score is, the better these terms are – you’ll get higher loan amounts, lower interest rates, and ideal term lengths. Higher business credit can also get you lower rates on insurance.

Whether it be through a business credit card, a line of credit or getting a loan, building your business credit shows that you can pay lenders back. This builds your track record, proving you’ll be able to take out more loans in the future. Thus, contributing to your business’s growth.

Net 30, Net 60 Approval

It’s not only banks that use credit. If you deal with paying by invoice, having little or no credit can make it harder for your vendors or distributors to approve you for Net 30 or Net 60 terms. Why? Because if you don’t have credit built up, they don’t have anything to go off of. Since an invoice is essentially a form of debt, if you don’t have a record of paying back your debts, they’re less likely to trust you with a new one.

Visibility

Unlike personal credit, business credit makes your business public. Only you and a few other certain parties (lenders, for example) can see your personal credit. This isn’t the case with business credit – as long as an individual or company is willing to pay for it, anyone can see your business credit score.

Since business credit is public information, customers or partners can use that information to determine if they want to do business with you. This might sound intimidating, but most of the time, people won’t want to do business with a company that doesn’t have their credit information public. If you’re not actively building and adding to your business credit score, people will see, and that could mean less business for you.

Personal Credit vs. Business Credit

According to Experian, one of the credit score reporting agencies, keeping your personal and business credit separate is vital. It’s risky to intertwine your business finances with your personal finances, but there are other actual benefits of separating them. Many lenders and creditors are leaning away from relying on personal credit when trying to judge a business’s financial health because it’s not a great predictor for a business’s behavior.

Nerdwallet also says that keeping business and personal credit separate can be highly beneficial when it comes to tax season. It makes it that much easier to track your business expenses for tax purposes, and it’s always better to be on the safe side when it comes to the IRS.

How Can FaaSfunds Help Build Business Credit?

What if you could have on-demand assistance to help you establish your business credit? What if there was a way to manage personal credit and also see how it affects your business’s financial health? FaaSfunds exists to do just that. We’re here to help monitor and make suggestions to help your business credit and navigate the complicated world of making financial decisions. Don’t be part of that 82% that doesn’t know how to interpret their business credit – let FaaSfunds help.

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