Everything You Need to Know About Business Credit Cards

Photo (cc) by Håkan Dahlström

The following post comes from partner site LowCards.com.

After the financial crisis in 2008, banks tightened lending to small businesses to cut their financial risk. But many businesses still need a line of credit to continue to operate.

Credit cards have become an important source of capital for many small business owners. According to a report by the Federal Reserve (PDF), 83 percent of the 27 million small businesses use credit cards. Of those, 64 percent used small business cards, while 41 percent used personal credit cards.

While credit cards provide a helpful financial lifeline, business cards don’t have the same protections as consumer cards, and there are many hazards that should be avoided.

Getting a business credit card

Small business credit cards are only for small business owners, not consumers. Business cards often have higher credit limits than personal cards and include business services like employee cards, customizable spending limits, and spending statements. Small business cards also offer rewards, balance transfers, and introductory rates.

It’s easier for small businesses to get a credit card than a line of credit or bank loan. According to the Federal Reserve, about 20 percent of small businesses attempted to get a new credit card in 2009, and nearly three-fourths of applicants were approved. During the same year, only one-third of small businesses successfully applied for a line of credit, while one-half of applicants were granted a bank loan.

Credit history

Just like personal credit cards, issuers give the best terms to businesses that have an excellent credit history and have been operating for several years. Accessing credit for your small business depends on a number of factors: your personal credit history, how long you’ve been in business, cash flow and credit history for the business, and other available credit lines.

Card issuers want to extend credit to businesses that show a track record of timely payment to suppliers and positive cash flow. Typically, the best business card offers are extended to companies that have been in business at least two years. A business owner’s personal credit will usually be assessed during the credit process when applying for a business card.

Individual and company liability

Small business owners should read the credit terms to see how the issuer will handle the card debt if the small business fails. Many cards have a provision called the “Individual and Company Liability” clause stating that the individual who applied for the card and the business are jointly responsible for the card debt. The applicant thus becomes personally liable for all charges on the card.

If the business has trouble paying off the card, it will pull down the cardholder’s personal credit history. Some card issuers don’t use this provision in their credit terms. You must have well-established credit history to avoid such a clause.

Risk to the issuer

A small business credit card is riskier for the issuer than a consumer credit card. These cards are also unsecured loans, so any default or unpaid balance leads to a write-off by the bank. The balances on a business card are typically much higher than consumer cards, so the risk is greater.

According to the Federal Reserve report, small business card loss rates have been roughly 20 to 30 percent greater than for consumer cards.

Hazards of small business cards

Business cards function like consumer cards, but lawmakers didn’t include business cards in the CARD Act regulations. Hence, business cards contain many of the punitive terms that are no longer legal for consumer cards.

Issuers may still change the card terms at any time without notice, including raising the interest rates on existing balances. Issuers may also apply a penalty rate immediately without providing notice of a violation, and this rate can last indefinitely. Issuers may direct payments to the lowest interest rate first, maximizing interest payments. Some issuers, like Bank of America and Capital One, voluntarily follow some of these rules for business cards. Some lawmakers want to extend these CARD Act protections to business cards.

“After going through the debate, passage, and enactment of credit card regulations for consumers, it is surprising that business owners are still under the same terms that brought criticism and outrage from lawmakers,” says Bill Hardekopf, CEO of LowCards.com. “Business owners are on their own and must understand the terms of their card and how to navigate the penalty landmines.”

Reward programs

Just like consumer cards, many business cards offer rewards that can include cash, travel, merchandise, and gift cards. Some business reward cards don’t charge an annual fee. Read your fine print to discover which purchases qualify for rewards since some cards will cancel reward benefits if the items purchased are not used for a business purpose.

Mobile applications and online banking

Some credit card companies are starting to ramp up their use of online and mobile account servicing. American Express OPEN and Ink by Chase are two business card platforms that have very useful options for mobile banking. Small business owners can use these tools for maximum convenience if they are on-the-go. Both companies use the tools that work with most any iPhone or Android mobile phone.

American Express OPEN offers business applications that allow you to do basic accounting services such as view your statement and pay your bill. A Search Manager section helps with advertising and social media campaigns. The OPEN Forum section allows small business owners to network or post tips for other business owners.

Ink by Chase has a program called Jot that allows customers to pay their bill, view statements, and redeem reward points. You can also add an employee card or set up an additional account.

Sample business card offers

The Plum Card from American Express OPEN – This has some unique features for those looking for big discounts and flexible payment plans. It has a payment plan that offers a 1.5-percent discount if you pay off your entire balance within 10 days of your statement closing date, or you can take up to two payment cycles to pay off your new balances. This type of card has discounts and advantages but it has a high annual fee of $185. The international transaction fee is 2.7 percent.

Capital One Business Platinum with Preferred No Hassle Miles – This credit card has 0-percent APR on purchases until April 2012, then as low as 9.99-percent APR. Earn 3 miles per $1 spent in the category of your choice and 1 mile for every dollar spent in all other categories. There is no annual fee. The card is a possible choice for a business owner trying to build credit.

New Ink Cash Business: This card pays 2 percent cash back at restaurants and gas stations, as well as 5 percent cash back on office supplies, wireless, landline, and cable services. The cardholder earns 1 percent on all other business purchases. The introductory offer is 0-percent APR for six months. You receive $150 cash back (15,000 points) after your first purchase, and an additional $100 (10,000 points) if you spend $5,000 in the first three months.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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