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The Ultimate Guide to Using a Business Credit Card

Last updated on September 12th, 2023 at 11:43 am

Almost every company needs access to credit, and credit cards are a convenient method to do so. Deferring payments to the end of the month helps businesses improve cash flow management and increase their purchasing power while also taking advantage of rewards offered by credit card companies. Just like consumer credit cards, they are a quick, (relatively) easy way of accessing short-term financing and an appealing alternative to other forms of credit. However, the cost of borrowing using a credit card is higher than a loan or line of credit, and missed payments can leave you with a hefty interest rate. So, is a credit card the right solution for your business? This guide to using a business credit card will cover the pros and cons of business credit cards and the best ways to use them. But first, let’s start with the basics.

How does a business credit card work?

A business credit card effectively works the same as a personal credit card. It provides revolving credit allowing you to make payments (up to a fixed limit) using the card company’s funds, settling the balance later (typically each month). If you meet your monthly payments, it is that simple. You aggregate business payments on the card, paying them all together rather than one at a time when the transaction takes place.

However, credit cards come with interest. You will receive a statement showing your balance and a minimum repayment each month. Failure to pay off your balance will result in the card provider charging you interest. Failure to meet the minimum repayment will add a late fee on top of the interest and will likely reduce your credit score.

Credit card companies also use two types of balance that you need to understand. Current balance vs. statement balance can be confusing. Current balance is a real-time reflection of your spending, while the statement balance is the amount due at the end of the next billing cycle. These two amounts may differ as you continue to spend between the end of a billing cycle and paying off your statement balance.

While business credit cards are very similar to personal cards, they are designed specifically for business purposes. This means they generally come with higher credit limits but also higher interest rates.

The pros and cons of using a business credit card

If you’re wondering if a business credit card is an appropriate payment method for your business, we’ve listed the pros and cons to help you decide.

Pros:

  • Credit cards are more accessible and easier to qualify for than a loan.
  • Credit cards offer convenient and quick access to additional funds to make a payment.
  • Credit cards can provide a much-needed financial cushion if incoming payments are unexpectedly held up.
  • When used correctly, credit cards help build your business’s credit score.
  • Card providers offer reward programs tailored to businesses. This could include discounts with partnered brands or air miles.
  • Credit cards help small business owners separate their personal and professional spending, simplifying bookkeeping and tax season.

Cons:

  • If you fail to pay off your spending each month, you will be charged a higher interest rate than other forms of credit (e.g., a loan or fixed line of credit from a bank).
  • The interest rate you pay also fluctuates depending on how you manage your spending.
  • You may have to pay an annual fee for using a business credit card.
  • The card provider may also ask for personal liability, meaning how you use your business card affects your personal finances.
  • Credit cards present a security risk if their information is lost or stolen.
  • Business cards often provide reduced protections compared to personal cards.

Whether the pros outweigh the cons depends on your specific business and how you want to manage your payments. Consider your current cash flow situation and whether a credit card would benefit your business. Before applying, ensure you understand the risks that come with a business credit card and are confident of meeting your payments.

Best practices when using a business credit card

Some businesses rely heavily ontheir credit cards, paying many expenses on a single card to simplify bookkeeping and track all of their spending. While others use their credit card sparingly, treating them only as a safety net when they need additional funds on short notice.

However you choose to use your card, spending on credit must never be taken lightly, and you should carefully consider what to put on your credit card and what to pay by other means. You need to plan ahead and ensure you always have the requisite incoming funds to avoid missed payments and the additional fees they bring.

Plus, while making the most of your credit limit can be tempting, experts agree you should to maintain a credit utilization ratio (CUR) below 30%. CUR describes the fraction of your total credit in use. For example, if you have a $5k spending limit and your balance is $2.5k, your credit utilization ratio is 50%.

High CUR makes it look like your business is maxing out all available funds. It suggests you are overleveraged, causing your credit score to drop. Conversely, very low CUR is also a potential red flag, as you may be mismanaging finances and not making the most opportunities available to you. So while you want to be below 30%, you don’t want to be at 0% either.

Another critical factor when using a business credit card is deciding who gets access to it. Giving employees a card simplifies paying expenses. You no longer have to ask them to pay upfront, reimbursing with company funds afterward. But, it’s easy for credit card spending to spiral for the sake of convenience. You need to find a good balance and have concrete approval processes in place for when business cards can be used.

So what shouldn’t you use your business credit card for?

  • Personal spending: You should always keep business and personal spending separate.
  • Large purchases: Credit cards are designed for short-term purchases that you can pay off each month to avoid the high interest. You should use other forms of credit (such as a loan) with a lower interest rate for larger purchases that will take a long time to pay off.
  • Payroll: On a similar theme, salaries are one of the biggest expenses for a business and should not be put on a credit card.
  • Investments: Long-term commitments do not mix well with credit cards, as you never know when or if you will make a return.

Safely making the most out of business credit cards

Credit cards come with risks and have to be used responsibly. With high-interest rates and the potential for spiraling debts, what started out as a useful tool to manage your cash flow can quickly cause real damage to your business and even personal accounts.

On the other hand, credit cards are a convenient and useful payment method for a large number of businesses. With proper cash flow safeguards in place, you can minimize risk, boost your purchasing power, and take advantage of rewards.

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