credit cards

Bottom line on small-business credit cards

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Highlights
  • Separate cards allow owners to easily separate personal and business expenses.
  • A lower credit rating can trigger a higher interest rate and smaller limit.
  • To qualify, the business has to be classified as a genuine enterprise.

A small-business credit card can be a perfect financial product for a small-business owner. But "can be" doesn't always mean "is." Rather, owners must consider their needs, weigh the costs and risks, and read the small print before they decide.

Business credit cards offer some nice benefits, according to Janet Zablock, global head of small business at payment processing giant Visa in San Francisco.

Specifically, she explains, these cards can help owners separate their business and personal expenses, get better views of their operating costs, bridge the gap between receivables and payables by periodically revolving business debt, establish a business credit history and take advantage of discounts offered through a business credit card program.

"The key is keeping personal versus business separate and making sure they're responsible in managing the financial end of the business," she says.

American Express, Bank of America, Chase, Capital One and Citi all offer small-business credit cards, as do many smaller banks and other financial institutions. Some cards have no annual fee. Others charge $59 to $95 per year or more. The first-year fee is often waived as an inducement to new customers.

Personal credit

Most issuers require excellent credit to qualify. Some will accept average credit, though that typically will trigger a lower credit limit and higher interest rate. An owner whose personal credit history is poor is likely to be declined regardless of the business' strengths or weaknesses.

That might seem strange, except for the fact that most business credit cards hold the company owner personally responsible for the debt, according to William McCracken, CEO of Synergistics Research Corp., a financial services research company in Atlanta.

"A lot of people mistakenly think, 'I have XYZ Widget Company, and I have five people, and I want the company to be on the hook,'" McCracken says. "They quickly find out that for small businesses, there is no such thing. If the company doesn't pay, they come after the owner directly."

The risk can be considerable, especially for startups, adds Jim Angleton, president of AEGIS FinServ Corp., a business finance and bank consulting firm in Miami.

"When you fail, they're not going to sue the company," Angleton says. "They're not even going to go after the company. They don't give a damn about the company. They're going to sue you for your guarantee, go straight to court and get a judgment against you, and then levy your bank account before you've even thought of bankruptcy. The terms and conditions allow them to do that."

Such bad outcomes can pop up on the owner's personal credit report as well, according to Anthony Sprauve, spokesman for MyFICO.com, a consumer credit information website operated by FICO, maker of the FICO credit score.

"It's important to see how they report the card," Sprauve says. "If they report the card as a business card with the business being liable, that's very different from reporting the card as a personal card that's under the heading of a business."

Small business

Small-business credit cards tend to make the most sense for companies with annual revenues up to $10 million to $25 million. Beyond that, most larger companies turn to corporate credit cards, commercial loans or other more complex financing options, Zablock explains.

Angleton offers two examples of ideal small-business credit card customers: "The perfect person would be a dentist who wants to buy a piece of used equipment that he can't get financing for from a private party or an attorney who wants to buy a nice conference table from an auction. No one is going to give him $20,000 for furnishings for his office."

Owners of microbusinesses such as those who make handmade crafts or semiretired consultants also can qualify for a small-business credit card if the business is a genuine enterprise. That doesn't mean everyone should have such a card, however.

McCracken says issuers can face government regulatory problems if they hand out cards to people who don't have true businesses. That's because business cards offer fewer protections and require slimmer disclosures than do cards intended for consumers.

Owners whose credit isn't good enough to qualify for, say, a $50,000-limit business card can apply for what Zablock describes as a "basic credit product" that has a lower limit.

"It probably doesn't come with travel rewards or cash back," she says. "But it would be an entry point for someone to begin to establish their business credit history."

Ability to pay

One final point: Business cards are best for businesses that can support the debt, a judgment call that's not always easy for owners to make, especially in the startup phase. Some want to push the envelope, hoping to build quickly and improve their cash flow. Others are more conservative. Either way, there is a risk.

"There is a tension there," McCracken says, "and it's a challenge for small-business owners to know which way to head."

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