Starting your own business might be a scary decision to make, but certainly, it can also be one of the most rewarding experiences you will ever face and enjoy in your life. If you are currently in the process of embarking in the journey of becoming an entrepreneur and a business person, it is key for you to be aware that at some point you might have to apply for credit in order to sustain or expand your business.
Just like any individual has to face a credit score to determine their creditworthiness, the same applies to companies and private businesses. If you are a small company or a startup, it is highly probable that you will have to start building a credit score and history to back your firm. One of the most common paths utilized to build business credit is by getting a credit card.
Even though this is a pretty common practice to create a credit history, it is key to keep in mind that credit cards can also become a big problem if not managed accordingly. While interest rates on business cards are considerably lower than traditional cards, it is still high compared to other borrowing products like credit lines and loans. if you are planning on financing through your credit card you might want to rethink twice as it could easily cost you 3 times as much as other products.
The idea behind this article is to provide insight into how a business credit card works and also the best cards available in the market. It is important for you to take your time to understand what your business needs are in order to choose the best card for your company.
What is a Business Credit Card?
A business credit card is designed with the intention of being used by a company or a business instead of the personal use of an individual. This type of card can be pretty useful for small companies who are trying to build up a credit record and also to consolidate their spending in an effort to minimize it but also to record it better.
One common misconception is that a company should be huge or have many employees for it to be eligible for credit cards, in reality, it is simpler and more accessible than that. Over the years the demand for this type of product has become so high that many financial institutions started to look for ways to open credit lines for startups and companies without a business record. One particular structure that has become very popular is for individuals to act as personal guarantees for the business credit cards, this model would allow for the integration of personal liability in order to back the structuring and the debt.
Just like with a traditional credit card, mishandling can lead to expensive problems that can easily damage someone’s credit score, and put any new company in a precarious situation.
Here are some of the most important pros and cons of business credit cards. It is worth mentioning that these are not standard terms and they can vary between financial institution and even card membership.
- Build Credit: It is fairly common to see individuals upset after being rejected for a Business Credit Card, many believe that by having a great credit score it will automatically grant their ventures with the same benefits and this could not be further from the truth. Individuals should be aware that when acting as a company they will have to start their own process to build their credit as an institution and not as individuals. If you starting a company and you need access build a credit history then you should consider a credit card as one of the most straightforward options, proper management will help you achieve more complex borrowing products like credit lines and loans.
- More Secure Than Cash: Not only a credit card will allow you to monitor and keep a tight accounting of your expenses and your payments, but it will also regulate against fraudulent movements. Keep in mind that depending on how advanced your company/business might be, you might not want to deal with managing cash do to all the risk inherited with it. Being able to always control and monitor transactions is a way to avoid problems since the beginning.
- Rewards: Depending on the type of card that you will be using it is possible to take the benefits even further with rewards and miles programs. Even if it doesn’t sound like a lot but if you are planning on managing a big part of the spending of the company via a credit card, you would be surprised by how many miles you can manage to get in a year. The same goes for other rewards like discounts or cash-back, picture it this way, you are a company focused on sales and you are constantly buying new inventory for the firm. Even if the card only offers you a cash-back of 2%, imagine being able to apply an automatic discount to all your purchases. If you start adding up dollar after dollar, you will end up with a considerably large pile of cash over time.
- Easy Qualification: Believe it or not but applying for a corporate card can be easier and less complicated than what it takes to get approved for a personal credit card. If you have a decent business model and are starting operations with a properly prepared forecast and business plan, you won’t encounter many problems in the process. Depending on the stage of the business you might want to apply with a traditional bank as you would be able to sit down with one of the executives in a branch an go through everything easier.
- Cost of Borrowing: If you are planning on carrying a balance in your card or to simply finance a purchase, it is incredibly important to keep in mind that while it can be convenient to do so, it is definitely not cheap! Business Credit Cards offers one of the highest APRs in the market, even though their rates might be a little bit more favorable than personal cards, it still too high compared to other borrowing products like credit lines or even business loans.
- It’s Easy to Dig Yourself into a Hole: As mentioned above, while utilizing a card can be convenient, it can easily become a problem if you don’t take proper care of your debt. In the hands of the inexperience and the unprepared, a credit card can become in a double-sided sword that can destroy a credit score and even a small business. It is your responsibility to be aware of your ability to repay your debt before swiping your card. If you are not sure of being able to repay for your purchase I would recommend leaving your card at home to avoid any temptations. The whole idea of this article is not to create fear of cards but to create some conscience about the negatives of not taking proper care of them.
- The application process can damage your credit: It is important to understand that whenever you apply for a borrowing product or a credit line the institution receiving the request will proceed to inquire about the company’s credit score. Even though this might sound inoffensive, there are two types of inquires hard/soft. If the institution proceeds with a hard inquiry it will affect your score as the credit bureaus will be signaled with your intention of getting credit and possible getting in debt. In order to avoid affecting your credit score for no reason, I personally recommend understanding deeply the necessity and the reasons to get a credit card. This will allow you to narrow down the number of options so you can focus on one for two. In the end, it is recommended to only apply to one card at the time. This is a situation where acting as a sniper will help you more than you can imagine, select a target and work on it.
- Personal Credit Issues: Since a company has to apply and work to get their own score, many individuals believe that this will not have an impact on their personal scores and this could not be further from the truth. As the owner of the company if you result in a default or bankruptcy it will be reflected on your credit score as well. Please be aware of this before making risky decisions as it will not only affect the company but also your name and your pocket directly. It is also important to understand that most banks will ask for a personal guarantee, this is similar to the cosigner in a student loan. This is a requirement imposed to ensure that in case of the company dissolving the bank will be able to charge the repayment directly to a physical individual.
- Risk of Employee Abuse: While credit cards can be safer than cash when it comes to managing payments and simply carrying them around, it is key to understand that they present their own type of risk. If you are planning on giving a business or corporate credit cards to different individuals in your company, it will be important to also establish a model to review all the spending and to make all employees prepare expense reports. This practice will prevent individuals from utilizing the company credit card for their one benefit. You would be surprised by how much money this wrongful practice costs small and medium companies in the US each year.
Best Business Credit Cards
1. Chase Business Preferred – Visa | Overall Best Signing Bonus
Over the past years, Chase Bank has been trying really hard to take the throne of AMEX as a symbol of status and wealth. Their Preferred program was developed with the sole intention of matching and improving the benefits that an individual would receive with most American Express Cards. Even though it is a tough fight I’ve found that they both fall into different categories once you look at the micro details.
This is a card that it is for someone interested in a premium service, at an accessible price and with a great sign in bonus. It can not be compared in terms of the luxury benefits of an Amex Platinum but when it comes to the real deal of using your credit card, it is truly a close fight.
Many people believe this card charges a considerably expensive annual fee but once you consider that your signing bonus is worth more than $1,000 then you realize that you are actually getting money from owning the credit card. Not many firms can say that individuals will actually be the winners out of having a credit card.
APR: Variable 18.24%-23.24% | Intro APR 0% (not offered)
Credit Card Type: Unsecured
Minimum Credit Score: 740+
Annual Fee: $95
2. Capital One – Spark Cash | Overall Best Office Expenditure
Some times in life it is better to aim for something that it is simple and minimalistic than going for the flashy option, while many individuals still prefer a posh looking credit card, there are others truly interested in getting a good service and a product that is easy to understand.
If you fall into the latter category then you are in a good time as this might be the best business credit card that you will find in the market. This is a credit card that is very straightforward and easy to understand, Capital One has made an incredible job making this a product that is crystal clear. If you’ve had bad experiences with the fine print in a credit card contract in the past, you might want to look at the Spark Cash card as your next CC.
APR: Variable 19.24%| Intro APR 0% (not offered)
Credit Card Type: Unsecured
Minimum Credit Score: 700+
Annual Fee: $95 (Waived for the first year)
3. American Express Business – Platinum | Luxury, and Status
Over the years American Express has become an important symbol of wealth, status and even a piece of true historical Americana still standing. If you need a credit card you don’t get an AMEX because you need one but because you want one. The platinum cards have become more of a status symbol than a financial instrument over the years.
If you meet the Minimum cash requirements to apply for this card it is important for you to understand this piece of metal (yes… metal) will open doors for you and your business. One of the most important benefits of this card is their concierge service and how well they perform when it comes to traveling.
It is important to mention that this is a ChargeCard which means that you are supposed to pay back in full your balance every month. Financing is available but it will have to be requested manually in case you are interested, keep in mind that nothing in this card is cheap and interest rates won’t be either.
Credit Card Type: Charge Card (Balance must be paid in full every month)
Minimum Credit Score: Excellent 740+
Annual Fee: $595
4. Simply Cash – AMEX | Overall Best Business Credit Card
AMEX by itself is a symbol of wealth and status, this might not be as posh and luxury as the Platinum card but it is an even better deal if you really are interested in a proper business oriented credit card.
The whole idea of this card is to help small business operators to make the most out of every penny they spent, it is important to keep mind that this is probably one of the very best cards in the market if you are focused on cost efficiency. Not only you will not have to deal with an expensive annual fee but you will be getting one of the best cash back programs in the entire market. Not every credit card provider can give you an automatic cashback of up to 5% on all your purchases.
Another point where this credit card truly stands out is in its flexibility, not only you are getting a reasonable APR but for the first nine months of your service, you will be able to get zero interest rate. Keep in mind that we mentioned this as it can be beneficial for small companies to actually grow without having to pay interest on their borrowing during this period of time, and not to promote getting in debt.
If you are planning on giving trustful employees a credit card to act on behalf of the company, this might be your overall best option in the market since AMEX will not charge you anything for additional credit cards.
APR: Variable 14.49% – 21.49% | Intro APR 0% (9 months)
Credit Card Type: Unsecured
Minimum Credit Score: 700+
Annual Fee: $0.
5. Citi Business – AA | Overall Best for Local Travellers in the US
Citibank core business over the past decade has been corporate banking. The whole idea of offering this type of products is to start building a relationship with companies with high potential and that have high chances of becoming a bigger client in the future.
The bank offers a very straightforward product, easy to use and to understand. It is important to mention that this is a credit card that works great for someone who is doing business in the US and has to travel a lot locally. While American Airlines do offer access to miles and benefits for international traveling, you should keep in mind that it is in the local traveling where you can make the most out of this credit card.
If you spend more than $3,000 on your first 3 months of service you will get 50,000 bonus miles with the American Airlines Advantage Program, and the same will happen every year you renew your membership.
APR: Variable 17.99% – 25.99% |Intro APR 0% (not offered)
Credit Card Type: Unsecured
Minimum Credit Score: 700+
Annual Fee: $99 (Waived for the first year)
From a management perspective getting a credit card might be one of the best decisions you can make in order to save time and also to improve the control over your finances. Disregarding your industry it will be key to always remember the risks and the problematics associated with utilizing a credit card in your company. Keep in mind that the real problem is not the credit card, but the individual using it without a tight leash or a stablished control.
Even if you think that it might help you cover unexpected expenses and that it can solve certain financial situations, it is important to always remember that this is a scheme where you enjoy know but you will have to pay it later. Credit Card APRs are incredibly high which makes financing super expensive.
Running a business is already stressful enough for you to allocate part of your mental focus thinking about credit card debt so early in your business life.
It would not be fair if I simply focus only on talking about all the problems without bringing to the table all the benefits that a credit card could bring if managed appropriately. It is your responsibility to remain on the right track, making sure to always pay. If possible aim to automatize payments, that way you will not put yourself in a position of having to deal with high fees and penalties.
As mentioned always, take your time to review all your different options before making a final decision. There are literally hundreds of options in the market to choose from, with the proper investigation and review it is very likely that you will be able to find the very best option that will meet all your expectations.
There is not a standard set of parameters or requirements needed in order to apply for a business credit card, it is important to remember that it will vary depending on the financial institution and even the state from where you are applying.
Some of the most basic things that are requested by almost all financial institutions are that the company would require to have a personal guarantee to back the card and its debt. As you can imagine, the limit of the card will be also based on the existing credit score of the personal guarantee, this creates another barrier for individuals with problematic credit history. ***There are other options like Secured Business Credit Cards, these can be obtained by individuals with bad credit score***
Other requirements are:
- Business Legal Name (C-Corp, S-Corp, LLC, LP)
- Contact Information for the Business
- Industry Type
- Financial Statements
- Federal Tax ID
Many financial institutions offer specific credit cards for startups, while the overall structure for the card follows the typical business or corporate model, the credit score utilized for the application will be one of the business owners. Keep in mind that this is not the norm in terms of business cards and that not many financial institutions actually feel comfortable lending to startups.
If you have a decent credit score you might want to look for this type of credit card as it will offer even better interest rates and benefits than your traditional and personal credit card. Startup cards usually have one of the lowest APR in the market, making very appealing.
It is not 100% certain that you will be able to get a credit line through your credit card, having said so it is one of the most common paths followed by new business owners.
If you are starting a company it is very likely that you won’t have the required credit history as a company to apply for most common borrowing products at a bank. By getting a credit card you can start paving the road towards more complex products.
The idea behind doing this is to improve and build your credit score with the intention of gaining access to other products and services in the future.
This is a fairly common question and also a complicated one to answer. In reality, doing both things will result in denting your credit score. The reason for this is that having many credit cards with outstanding balances will raise red flags but at the same time maxing one out will put you in a precarious position against the credit bureaus.
From a credit score perspective the worst you can do is to max a credit score, to put into perspective it is never recommended to exceed the usage of a card in more than 30% at any given time. This is considered to be the rule of thumb on how to get the max out of a card without getting into territory that would otherwise affect your credit score.
Since applying for a business credit card is so straightforward and easy, it makes it the go-to option for business owners interested in building credit for their company. There are other ways like acquiring services that report to credit bureaus like utilities (internet, gas, insurance), if possible you can aim to utilize providers that will report to credit agencies in an effort to provide more data to your history.
Keep in mind that due to all the different facets of a credit card, it offers a great and detailed view of how the individual behaves in terms of spending. If you have the means and also the self-control in terms of taking proper care of a credit card and its repayment, it might be the best possible option to build credit out there. Don’t forget that credit agencies want to see how you behave, having a credit card and never utilizing it will not make the cut.
Take small steps utilizing it, as time goes and you feel more comfortable with the management you will be able to spend more with the card without breaking your own barriers. This might be a basic fact about credit cards, but it is key to remember that you should never spend money you are not fully certain of being able to repay in full within the same billing cycle.
Financing with a card is expensive, avoid it at all cost if possible.