Business credit cards are short-term funding options for owners looking to finance ongoing business expenses. These cards have costs, including annual percentage rates (APRs) and annual fees. They allow business owners to keep personal expenses separate as well as manage employee expenses. Owners will need at least a personal credit score of 640 to qualify.
If you’re asking yourself, “How do business credit cards work?” it’s actually not complicated. Managing business expenses is made easier when you know how to use the best business credit cards. Like personal cards, you can get a business credit card that offers rewards and benefits like car rental insurance and purchase protection. The Chase Ink Business CashSM offers cash-back rewards on everyday expenses as well as 0% APR for the first 12 months.
Here are nine things business owners should know about how business credit cards work:
1. You Need Solid Credit Scores to Qualify
Before understanding how to use a business credit card or revolving credit, businesses should consider their own personal credit profile. This is because most business credit cards require a personal guarantee, and creditors will review your consumer credit file to determine credit eligibility. Understanding where you stand can provide insight into what creditors see when they review your credit profile.
Business Credit Cards Can Affect Your Personal Credit
Business credit can affect personal credit in a number of ways. So, how do business credit cards work with personal credit? Most business credit cards require a personal guarantee even if owners use their business profile to apply. However, this doesn’t mean that you’ll automatically see it on your credit file. Some credit card providers don’t report activity to your consumer report unless you’re late or in default.
Creditors Review Personal Credit Scores
Checking your credit report can help you better understand your position with creditors. Credit scores range from 300 to 850, with 850 landing owners in the excellent credit score range. To get approved for most business credit cards, you’ll need a credit score of 670 or above, but there are a few unsecured business cards that allow for credit scores as low as 640.
There are a number of factors that determine your credit score, including your debt-to-income ratio (DTI) and credit utilization. Lenders also look at the number of credit accounts you already have open and use that information to judge your ability to take on new debt. Timely payments, along with a low DTI and credit utilization below 30%, signal to creditors that you can manage additional debt wisely.
2. Business Credit Cards Have Financing Costs
Business credit card costs include APRs and annual fees. Not all cards have annual fees, and some cards waive the finance charges for an introductory period for as long as 15 billing cycles. Owners who travel internationally should look out for foreign transaction fees, which are included in some card rates.
The most common business credit card costs are:
- APR: The cost of financing purchases on the card. Business credit card APRs typically range from 12.00% to 26.00%.
- Annual fee: The fee you’re required to pay once a year as a cardholder. Annual fees for business cards typically range from $0 to $495.
- Penalties: Additional charges as a result of late payments, including non-sufficient funds (NSF) return fees and late fees as high as $39. It also includes a higher APR—as much as 15 percentage points or more above the standard APR.
- Foreign transaction fees: Charges incurred when the card is used internationally, typically 3%; however, travel rewards cards usually don’t have this fee.
- Cash advance: Owners looking for quick cash will pay a higher APR for that transaction, along with an added cash advance fee—ranging from $10 to $25.
Owners learning how to use a business credit card should look for introductory 0% APR offers to greatly cut the cost of financing. No-interest business credit cards are also great for transferring business debt from your personal credit cards without incurring a finance charge. Avoid paying APR completely by paying off the entire statement balance prior to the statement closing date. Most business cards have a 20- to 25-day grace period before interest is charged.
3. Businesses Can Earn Rewards
Business credit cards with rewards either offer cash back, points, or travel miles. Introductory rewards are usually a one-time lump sum of rewards that you’ll receive after meeting certain spending requirements. In contrast, ongoing rewards are continually earned as you make purchases.
Many business credit cards offer sign-up bonuses that encourage owners to open and continue using the card. After meeting spending requirements, the card issuer will credit your card account in whichever rewards category your card is based on. For example, a cash-back business card might offer $500 in cash back for spending $3,000 on purchases within the first 90 days. Introductory rewards typically range in value from $100 to $500 and higher.
Owners can earn ongoing rewards on travel and other business expenses like shipping, airfare, gas, and restaurants. Get ongoing rewards on expenses and save money by redeeming them for statement credits on purchases you’ve already made. You can also use ongoing rewards for discounts on future purchases. Rewards rates usually range from 1% to 5% and up on purchases. Review your company’s spending habits to determine what’s best for you.
4. They’re Easier to Get Than Business Loans
Business loans are a loan option for owners looking for large, one-time purchases, like property or company capital. These term loans require more paperwork and you may also face time-in-business requirements that credit cards don’t have. Business loans can take up to 30 days to process the application. Comparatively, business credit cards usually take seven to 10 business days to receive in the mail and owners have access to the funds right away.
Owners looking for quick funding on everyday expenses will do better with a business credit card. If the credit card limits are too low, you can try credit card stacking for quick funding on larger amounts.
Easier for Startups Than Business Lines of Credit
Business lines of credit (LOCs) have lower credit score thresholds than credit cards, but they require businesses to have been in business for at least one year. This means many startups won’t qualify for a business LOC. Startups that have been in business less than a year will find it easier to get a business credit card.
5. There Are Different Kinds of Business Credit Cards
There are different types of business credit cards that fit different company needs, including business charge cards and corporate cards. Business owners will need a solid credit history, excellent credit scores, and well-documented business revenue to qualify for these cards. Companies that use these cards typically have $4 million or more in annual revenue and at least $250,000 in yearly credit card expenses.
Corporate cards require no personal guarantee, so your personal credit won’t be affected by the activity on those cards. There are also no preset limits, and owners can issue employee cards and track spending just as they would on a standard business credit card. Corporate cards and business charge cards are great for businesses that spend over $20,000 on monthly expenses and can afford to pay off the balance each month.
6. They Separate Business Expenses From Personal
When owners can’t qualify for a business credit card, it may be necessary to use personal credit cards for business purposes. This makes it difficult to distinguish your personal charges from your business charges, and it could cost time and money to sort out the difference. Understanding how to use a business credit card correctly means properly separating business expenses from personal.
Using a business credit card will not only help you manage business expenses, but it can help build personal and business credit. As a result, owners who manage their credit responsibly won’t need to worry about any negative impact on their business or personal credit scores. Avoid legal issues by using business credit cards only for business expenses.
7. Business Credit Cards Help Manage Employee Expenses
One of the best ways to manage employee expenses is with a business credit card through the provider’s online management tools. Most business credit cards issue employee credit cards, free of charge. Owners can set individual spending and limit the number of locations where employees are allowed to make purchases.
8. High Limit Credit Cards Can Fund Large Expenses
If you have large ongoing expenses, a high limit business credit card is a good option. These credit cards offer higher limits than personal credit cards and allow you to make large business purchases without needing a second funding source. They also give owners available balances between $10,000 and $50,000.
Owners will still be able to take advantage of rewards, as most of these cards come with cash back, points, or travel miles. These cards typically require a credit score of at least 670.
9. They Come With Added Perks
The best business credit cards not only provide unsecured funding with rewards, but they also come with added perks that make using the card more valuable. These added perks include protections or benefits that businesses can use, like car rental insurance and airport lounge access. Some cards also include protections that owners can use to receive reimbursements on damaged or stolen goods after purchase.
The type of benefits a card has also depends on the business credit card. If you travel frequently, you’ll see the most value in features that make traveling easier, like expedited airport security screening, priority boarding, and travel accident insurance. By using the complimentary benefits a business credit card offers, you can save money on expenses. Before applying, consider the perks a credit card offers to see if that card is right for you.
Business Credit Card Advantages
Like other business products, business credit cards have both pros and cons to card ownership. One of the advantages of business credit cards is easy application without the extensive paperwork term loans require.
The advantages of using a business credit card are:
- Fast funding and access: Businesses have quick access to short-term funds. Unlike with a business loan, you can use your business credit card at local merchants or online. Owners typically receive their cards within seven to 10 business days.
- Easy to track expenses: Businesses are able to integrate online business tools like QuickBooks with most business credit card platforms for easier expense tracking.
- Build business credit: Many business credit cards report activity to the three major business credit reporting agencies—Dun & Bradstreet, Equifax, and Experian. Owners looking to establish business credit can do so with a business credit card.
- Manage employee expenses: Owners can use the online platform to issue employee credit cards, set spending limits, and view card analytics at a glance.
Consistent payments on a business credit card can boost your credit score and make you more attractive to vendors and creditors. Business expenses are more easily separated, and companies can use online business tools to track employee card usage. Some fleet cards allow owners to use employee driver’s licenses to approve gas purchases while reporting the grade of gas each driver is using.
Business Credit Card Disadvantages
There are a few disadvantages to getting a business credit card, which include fewer protections than consumer credit cards have. Business credit cards also tend to have higher credit limits than personal credit cards, so they often have higher APRs on average.
The disadvantages of business credit cards are:
- Less protection from changing rates: Business credit cards aren’t covered under The Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) of 2009. This law prevents card issuers from indiscriminately hiking APR rates on personal credit cards and sets restrictions around term changes. Business credit cards are subject to rate changes without prior notice, although most issuers avoid this practice.
- Employee card fraud: When multiple employee credit cards are issued, it can increase company exposure to fraud. The more cards that are issued, the more likely it is a card can get lost, stolen, or compromised.
- Higher costs: Business cards tend to have higher APRs than personal credit cards and business lines of credit. The 0% APR periods offered in comparison to personal cards are shorter overall.
Business credit cards are great for owners who need financing for ongoing expenses, but it’s not ideal if you need to make one-time purchases larger than $50,000. In that case, businesses that have more than $100,000 in revenue will be better suited for a business loan or line of credit.
Tips on How to Use a Business Credit Card
Businesses that want to know how to use a business credit card can start with making business purchases on their business credit card and not their personal card. You can also avoid unexpected dips in your business and personal credit scores by making timely payments.
The six tips on how to use a business credit card are:
1. Don’t Use Business Cards for Personal Charges
Use your business card responsibly by keeping your personal expenses on your personal accounts. Businesses can link their business credit card to their business deposit accounts, but you should never link a business card to a personal account for overdraft protection. Your personal account could inadvertently run up non-business related charges. Personal charges on your business can cause more than an accounting problems—they can also lead to legal issues.
2. Check Your Credit Report Often
Keep up with your credit reports, both personal and business. As long as you have credit accounts like business credit cards, you’ll need to keep track of which agencies are reporting your card activity. Dispute any credit information that is incorrect.
3. Limit the Number of Employee Cards
Business owners should only order the number of employee cards that are necessary. Too many employee cards can cause unnecessary purchases and increase your chances of being compromised by a fraudulent party. Cancel any employee cards that are no longer in use, like cards issued to former employees. You should also ensure every employee who has a card understands the company’s, as well as the bank’s, policies on reporting credit card fraud.
4. Use 0% APR Offers to Reduce Costs
For short-term expenses, owners can take advantage of 0% introductory APR offers. It’s common for new business credit cards to offer no-interest financing as an incentive for businesses. Owners needing to transfer balances or pay for unexpected expenses should start with a business card that delays the APR costs as long as possible.
5. Make Early Payments
Just like a personal credit card, business credit cards can have a negative effect on your credit profile if you’re not meeting your obligations on time. Making regular payments isn’t always enough. Businesses that want to go above and beyond can make early payments and reduce finance charges. You can also avoid credit score decreases when you make timely payments.
6. Look for Bank Relationship Benefits
Many banks, like Bank of America, reward cardholders who also have a deposit relationship with the issuer. Owners can get higher rewards, bank fees waived, and even get discounts on investments. Not all banks offer additional benefits for having a business card and a bank account, but if you find one that does, you can at least save on monthly maintenance fees.
Frequently Asked Questions for How Do Business Credit Cards Work?
While we covered a lot of information on business credit cards and the best ways to use them, there still may be additional questions. Here, we’ll address the most commonly asked questions about business cards and how to use them.
Do business credit cards show up on personal credit reports?
Depending on the institution, business credit card activity can show up on your personal credit report. Providers like American Express and Chase will only report business activity if your account is delinquent. Other providers, like Discover, may report all business credit card activity to consumer credit bureaus. Avoid negative reporting by making payments on time.
How do company credit cards work?
Company credit cards allow a business’ employees to make purchases by using a corporate credit card instead of their own cash. Much like business charge cards, company cards often have no APR charges since the balances are paid off each month. However, companies usually need at least $4 million in revenue to qualify.
How do you qualify for a business credit card?
Business owners with a personal credit score of 670 and above can qualify for most business cards. Depending on the type of business credit card you get, there may be other qualifications, like revenue or amount of monthly expenses. Most owners can get approved with an established employer identification number (EIN) and a high credit score.
For businesses that wonder how to use a business credit card properly, it only takes a few best practices to get it right. If you use your business credit card responsibly, you can reap some major benefits. Businesses can use business credit cards as a short-term financing tool to manage employee expenses as well as earn money-saving rewards.