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What is a business credit card and how do they work?

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If you are the typical American consumer, you have likely made use of credit cards to smooth your financial journey. Likewise, if you run your own business, you can tap into business credit cards to smooth your business operations.

What is a business credit card?

A business credit card is a card specifically designed for business owners that offers unique benefits suited to businesses. Business cards typically come with higher credit limits, greater rewards potential and tools to help you manage spending and employee cards.

As a business owner, you will need to continue meeting your fixed business expenses, such as rent and utilities, even if your business has cyclical patterns (such as snow supplies that experience high demand only in winter). You could draw on your business credit card to smooth out such fluctuations in cash flow.

Your business credit card could also provide ready financing in case there is an emergency situation for the business.

How a business card works

Business credit cards work in much the same way that personal cards do. You charge purchases on your card and then, after the end of each billing cycle, you receive a statement with your total balance owed and minimum amount due.

If you pay your bill in full each month, you won’t be charged any interest on those purchases. If you choose to carry a balance, you’ll start accruing interest on your balance. Like personal credit cards, business cards come with different interest rates: The more creditworthy your business, the more likely you are to get a favorable one.

That said, many business cards are actually charge cards, which require payment in full each month. The major upside with charge cards is that they generally have no set credit limit. While not the best choice for newer businesses with high startup costs that owners are looking to spread out over time, or for those with unpredictable income, the absence of a spending limit can make charge cards ideal for established businesses with big monthly expenses factored into the budget.

The benefits of a business credit card

Just like a personal credit card, a business credit card allows you to draw on a line of credit. Business cash flow can be erratic, but you do need money to fund your operations on a regular basis. That’s where a business credit card’s line of credit will come in handy.

  • Higher credit limits. These cards are suited to business needs and typically offer a bigger line of credit than the usual consumer credit card.
  • Track business spending. Business cards allow you to separate your business spending from your personal spending, which helps you maintain your accounts and prepare your tax returns, too.
  • Extended interest-free periods. Issuers can offer business owners extended periods of interest-free financing longer than the typical 21-day period for a personal credit card. If your business card offers such a benefit, it will give you a longer grace period to pay off your balance and flexibility to make business investments.
  • Extra travel rewards. Business credit cards could also offer bigger and better rewards. If you travel regularly for your business, you could get more travel rewards and miles, for one.
  • Generous sign-up bonus. Your business credit card could also garner a better sign-up bonus. And monthly cash-back bonuses could be bigger, too. All this will be additional money for you to invest back in your business.
  • Employee cards. Another benefit is that you can add employees to your business credit card and give them authorizations to perform certain tasks, such as making some purchases for the business. You can review all their activity and also accrue rewards on employee purchases. And you could set up individual credit limits geared to their activities.

The main disadvantage of a business credit card

If you decide to apply for a business credit card, one major negative to note is that these cards do not enjoy the protections offered by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act gives consumers various protections, such as preventing card issuers from raising interest rates without warning. You will have to decide whether the benefits of a business card outweigh this disadvantage.

How a business card impacts your credit

To qualify you for these cards, your issuer will look into your credit history and credit score. Since you are responsible for making payments on your business card, that will allow them to gauge how creditworthy you are. You may need to make a personal guarantee to be responsible for the debt on the card.

In that case, you will be personally liable for the debt in case the business has trouble repaying the credit card. Considering that the business could fold, too, issuers need to know that somebody will be held accountable if that happens.

Issuers could report the debt to business credit reporting services, but the debt will not generally show up on your personal credit report unless there is an issue.

If you do use your business credit card in a responsible manner, you will be rewarded by building up your business credit and being able to tap into bigger lines of credit and other business loans to grow your business if that’s your aim.

And in case your personal credit is tarnished for some reason, you can still take advantage of credit to fund your business needs (if your business credit continues to be in good standing).

Applying for a business credit card

When you apply for a business credit card, the issuer will ask you for information about yourself and your business. Be prepared with input about the firm’s tax identification number, business name and how it is structured. Also, have handy the company financials (such as sales and profit figures), the date the company was established and the location where it was established, as well as your personal information, including your identification, address and Social Security number.

The bottom line

Business credit cards are geared to the needs of businesses and tend to be better for your business than your personal credit card. Their credit lines are typically bigger and they will facilitate your accounting and tax filing. They can help smooth out your business operations and offer rewards that fit your business needs. One big disadvantage is that they don’t enjoy the protections of the CARD Act since that regulation is intended for consumers and applies to consumer credit cards.

Written by
Poonkulali Thangavelu
Senior Reporter
Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues.
Edited by
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Part of  Introduction to Business Credit Cards