It’s probably no surprise to you that credit cards play an important role in financing for small businesses. During the Great Recession, they were about the only way to finance purchases and get capital. Now, financing options have loosened up a bit, but credit cards still are essential to your business.
Here are some good things and bad things about using credit cards in your business.
1. Good financing option in some cases
You know that credit cards carry high interest rates, so using them as a basic funding option isn’t wise over the long haul. But it can make sense in some situations. If you need to close a short-term funding gap and you can find a 0% interest introductory rate, this makes sense.
2. Separation of business and personal finances
It’s essential to keep your business finances separate from your personal life. This can be easily done by obtaining a business credit card in addition to having a business bank account. Having a business credit card makes it easy to keep track of your business expenses. Of course, you must respect the use of the card and limit it only to business-related expenses, such as travel costs out of town.
3. You aren’t personally off the hook
When you apply for a business credit card, you likely have to give your personal guarantee. So if the business fails to pay the credit card bill, you’re liable for what’s owed. The credit card company can come after you and your personal assets, including your home and your personal savings, and your personal credit rating can be damaged.
4. Using a credit card builds the company’s credit rating
Assuming you pay your credit card bill on time, it’s a good way to improve your company’s credit rating. The card may offer a revolving line of credit and if you use it and pay on time, this too helps your credit rating.
If you apply for a business credit card and are turned down, consider a secured credit card. Your purchasing limit is tied to a bank account, thus securing the amount you use and protecting the issuer. After you build up good credit, you can then find a non-secured credit card that best suits your needs (see resources below).
5. Getting a business card is about to get harder
A new rule under the Bank Secrecy Act that goes into effect on May 11, 2018, requires each owner with a 25% or more interest in the business and any one person with responsibility for managing the business (e.g., a CEO or treasurer) to provide personal information.
If you don’t yet have a business credit card and want one, do it now so simplify your paperwork. All you’ll need now is the tax identification number and financial information about the business, plus the signature of owners giving their personal guarantees where required.
Which business credit card is right for you? There are many considerations, which I covered previously. But here are some resources to help you compare credit cards: