I get credit card offers just about every week. I’m tempted to get one for my business for emergencies. How do I choose the best card?
A credit card is an administrative tool for your business to make it easier to make purchases and borrow funds through cash advances.
The best benefit of using a credit card for business purchases is flexibility. It usually doesn’t take long to get credit approval and you can pay off the credit card balance at a speed that works best for your company’s cash flow.
In contrast, applying to your local or national bank for a small business loan, including loans that qualify for the popular 7(a) SBA small business loan program, will involve the completion of more extensive financial information about your company and you! It takes time.
For the most part, I’m not much of a fan of promotional programs that don’t involve cash savings to growing companies. I usually vote for credit cards that allow you to reduce borrowing costs when you need to carry-over monthly balances or maximize cash back benefits when you pay off a bill entirely, over credit cards that offer points to buy stuff.
Work the numbers. A one to three percent cash back feature on a select range of purchases up to a maximum amount per year (usually under $5,000) pales in comparison to double digit APRs for big balances. A good rule of thumb is most large banks charge up to 20% to 24.99% APR plus added fees after promotions expire.
Also pay attention to the cost of the annual membership, late payment fees and other charges. If you can, avoid signing up for cards that involve membership fees.
For business owners who travel frequently outside of the U.S., compare credit card foreign exchange processing charges which can be a shocking surprise, though again these rates can change at any time.
Here are some additional fine points:
- Reconsider professional business credit cards.
There are differences between so called “professional” small business credit cards and standard personal credit cards. Professional credit cards don’t have to meet certain federal consumer credit card protection rules. With professional credit cards, card issuers have greater leeway to change interest rates and fees at any time without notice to business owners.
The fine print from one major bank’s small business the fine print says: “The APR, annual fee and other fees and charges are not guaranteed and are subject to change. We have the right to change your terms, rates and fees at any time, for any reason…” Ouch!
With a consumer credit card, issuers have to wait 60 days to change a rate on a delinquent balance. And even then, the issuer is required to restore the lower rate once the cardholder pays on time for six months. For most other terms and conditions, credit card issuers have to provide 45 days notice and an explanation before increasing interest rates.
For companies that carry over credit card balances from month to month, this uncertainty can challenge cash flow budgeting. Why face this pain if you don’t have to.
- Understand your real payment liability.
The company officer who signs the credit card application is personally liable for unpaid credit card bills. This means that even in a business partnership, the officer who signed the credit card application is personally responsible even if the other business partner racks up a mountain of bills on the company credit card.
The same is true for companies that issue credit cards to several company employees, though most small business cards allow business owners to cap employee credit lines. But it gets worse. If you read the ultra fine print, some small business credit card terms and conditions allow the bank to pull unpaid funds directly from any related personal bank accounts held at the same bank! So this provision goes beyond a standard personal guarantee.
- Contingent liability reporting.
Most business owners assume that the credit information behind a business credit card is separate from the business owner’s personal credit information. But it often is not the case.
Because business owners agree to accept personal liability for unpaid credit card balances, credit card companies can report the contingent liability to credit bureaus. So if you are looking for a personal mortgage and you have signed for a business credit card, don’t be surprised if the payment history is monitored for personal credit scoring purposes.
For owners of companies that are consistently profitable, I typically encourage them to reduce their dependence on credit cards for lending purposes and seek asset-based loans. And guess what? Many large credit card companies are expanding their financial product lines to include innovative working capital lines of credit. Sure, initially the business owner will usually be required to sign a personal guarantee but the rates will be more predictable and probably lower.
The upshot is you don’t have to have a business credit card, but you will probably need some sort of credit card for travel and big equipment purchases. For small equipment purchases, check out micro-finance organizations in your state.