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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.

Janet Zablock, global head of small business at payment processing giant Visa in San Francisco, says business credit 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.
  • 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.

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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 as much as $450 per year. The 1st-year fee is often waived as an inducement to new customers.

John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax, says the fee shouldn’t necessarily be a reason not to choose a particular card, because perks like access to airport lounges more than make up for the cost.

“If you actually look at what you get in exchange for the annual fees, you actually get some pretty good stuff,” he says.

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 5 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, Ulzheimer says. While most business credit cards don’t appear on the owner’s credit report — it’s as if the credit line doesn’t exist — the issuer will report the card if it goes into default.

“You’re fine while the card is fine, you’re not fine when the card is not fine,” Ulzheimer says.

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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 2 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.”