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

Credit cards are a part of our daily lives — a convenient way to pay for essentials (and splurges) with a tap or a swipe. Likewise, if you run your own business, a business credit card can help you pay for expenses required to purchase supplies and run your day-to-day operations. Like personal credit cards, business cards offer the ability to earn points, miles or cash back on your spending and finance large purchases — sometimes with a 0 percent intro APR that saves you on interest.

When used responsibly, a business credit card can be a useful addition to your overall financial plan. Here’s what to know about this unique type of credit card.

What is a business credit card?

A business credit card is a type of credit card that’s designed for entrepreneurs and business owners, offering unique benefits suited to businesses of all sizes. When compared to personal cards, business credit cards typically come with higher credit limits, greater rewards potential, employee cards and tools to manage and keep track of business spending.

A business card can help you meet your fixed expenses, such as rent and utilities, and offers a way to cover fluctuations in cash flow or cyclical needs — such as snow supplies or other winter demands.

How a business card works

Business credit cards work similarly to personal cards: You charge purchases on your card that are drawn from a line of credit and then, at the end of each billing cycle, you receive an itemized statement of purchases, a total balance owed and a minimum amount due.

If you pay your bill in full each month, you aren’t charged any interest on those purchases. If you carry a balance, though, you begin accruing interest on your balance based on your card’s interest rates. Generally, the more creditworthy your business, the more likely you are to get a favorable rate when approved for your card.

That said, some business cards — like the Chase Ink Business Premier℠ Credit Card and Capital One Spark Cash Plus — are actually charge cards, which typically require payment in full each month. The main upside to charge cards is that they generally have no set credit limit. They’re perhaps not the best choice for newer businesses with high startup costs that owners are looking to pay for over time, however, or for those with unpredictable income. But the lack of a spending limit can make charge cards ideal for established businesses with big monthly expenses that are factored into the business’s budget.

You’ll find many business cards with no annual fees, though premium cards offering the strongest sign-up bonuses, rewards and perks typically come with one.

Benefits of a business credit card

A business card’s credit line can come in handy for regular expenses, as well as the periods of fluctuating cash flow that come with running a business. This is because many business credit cards offer:

• High credit limits. Business cards are suited to business needs, typically offering higher lines of credit than consumer credit cards.
• Business expense tracking. These 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. Some cards offer extended periods of interest-free financing longer than the typical period for a personal credit card. This is often in the form of 0 percent introductory APR offers, which can give you a longer grace period to pay off your balance and the flexibility to make business investments.
• Extra rewards. The best cards for business expenses offer bigger and stronger rewards on your spending than personal cards. If your industry requires regular travel, for example, you could earn cash back or points on flights, rentals and stays — for you and employees on your account.
• Business-related perks. You can score perks specific to business, such as free access to accounting software and service discounts for your business.
• Generous sign-up bonuses. These cards tend to offer stronger sign-up bonuses, also called welcome bonuses, than consumer cards, though often with an annual fee.
• Higher caps on spending. Many premium business cards also offer higher caps on spending, which could result in bigger monthly cash back bonuses that you can reinvest into your business.
• Employee cards. Business cards allow you to add employees to your account with customized limits on where and how they purchase items for your business geared to specific roles. You can review all employee spending activity and build points, cash or miles on employee purchases.

Disadvantages of a business credit card

While the benefits of a business card often outweigh disadvantages, you’ll want to know the potential downsides when deciding between a personal and a business card, too.

Here are some factors to keep in mind:

• Your issuer might require a personal guarantee. Many business card issuers require you to sign a guarantee that makes you personally responsible for any card debt your business can’t pay.
• Your card might come with high annual fees. The most expensive business cards charge annual fees of $500 or more, though it’s often balanced by strong rewards and perks on your business spending — from supplies and services, to client dinners, to domestic and international travel.
• Your card won’t have CARD Act protections. Business cards don’t qualify for the same protections that consumer cards do under the Credit Card Accountability Responsibility and Disclosure Act of 2009 — more commonly called the CARD Act — such as a requirement to warn consumers of planned interest rate increases. Read your card’s fine print to learn about issuer protections that cover your business.

How a business card impacts your credit

To qualify you for a business card, your issuer will look into your credit history and personal credit score to determine your creditworthiness and likelihood of paying back what you charge on time.

Issuers want to know that somebody is accountable if your business has trouble repaying its debts — or, worse, goes out of business. So, it’s likely you’ll need to sign a personal guarantee that tells the issuer you’re personally liable for any debts your business can’t pay.

Most business card issuers report the debt to business credit reporting services. Issuers like Capital One and Discover also report activity to the major consumer credit bureaus. Check your credit card agreement to find out who they report your debts and payments to — and when.

If you use your business credit card responsibly, you’re rewarded with a stronger business credit score that can unlock bigger lines of credit and other business loans to grow your business — even if your personal credit is poor.

Applying for a business credit card

When you apply for a business credit card, the issuer asks for information about you and your business. In addition to your name, address and Social Security number, you’ll want to have your firm’s tax ID number, business name and business structure on hand, as well as your company financials — such as sales and profit figures — and such information as when and where your company was established.

The bottom line

The best small-business credit cards are geared to a range of business needs, offering the flexibility to keep up with expenses — and earn you lucrative rewards on your and your employees’ spending. These cards often offer bigger credit lines than a consumer card and tools that can help you keep track of accounting and ease filing your business taxes. Start by narrowing down a card that fits your type of business, and then compare sign-up offers and rewards structures that fit your industry and business needs.