Business credit cards have a lot of benefits, but they aren’t as easy to get as personal credit cards. Credit card issuers put you and your business through the paces before extending your business credit – you need to have good credit score and sound revenue to get approved.
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Benefits of a business credit card
Just like personal credit cards, business credit cards are a revolving line of credit that carries a variable annual percentage rate (APR). Business owners use them to make purchases and are rewarded with cash back or points that can be redeemed for travel, dining, entertainment, and retail perks. Many business credit cards offer no annual fee or foreign transaction fees.
A business credit card has a lot of benefits if you use it responsibly. The last thing you want to do is rack up new credit card debt and compounding interest because you overspent and can’t pay your balance. “You can’t look at a credit card as that crutch that gets you to the next level,” Andrea Woroch, a money-saving expert told business.com. “It’s more the cherry on the top to help you earn back spending.”
For business owners who pay off their balance each month, there are three big benefits to using a business credit card.
1. You earn cash back and other rewards.
The credit card industry is cutthroat. Credit card issuers compete for customers, and generous sign-on bonuses and annual rewards have become a common component of a credit card offer. For business owners, that can pay off big time if they tend to spend a lot each month on their credit card.
“Using a business credit card as the primary purchasing solution for larger ticket items could mean thousands of dollars back to your business in the form of rewards,” said Dan Arellano, managing vice president, small business card at Capital One. The key is to pay off your balance each month so the interest rate doesn’t gobble up your rewards.
2. You keep your business and personal finances separate and simple.
A big don’t for small business owners is commingling business and personal expenses. The more your business and personal outlays are mixed up, the harder it is to manage cash flow.
By having two separate accounts, you won’t have to spend time figuring out what was a business purchase and what was a personal one.
It also simplifies the process of tracking business expenses, said Arellano. “You can often pull specific summary reports, which can make tax time much easier, as well as help you maximize deductions and minimize tax burdens,” he said.
3. You increase your borrowing power.
Using credit responsibly can boost your personal and business credit scores. If you keep a low balance and pay your bill on time, your credit score will rise. That will make it cheaper to borrow money in the future. Plus, your credit limits will increase over time.
“Opening up a business credit card is a great way to help build your business’s credit and financial history,” said Brian Bond, senior vice president of product, marketing, and strategy for Experian Business Information Service. “Proactively maintaining a line of credit demonstrates fiscal responsibility that is taken into account when calculating a business’s score.” [Ready to shop for a business credit card? Check out our credit card buyer’s guide.]
Business credit card approval requirements
What credit card companies look for when approving an applicant should be top of mind when you’re considering applying for a business credit card. After all, if you don’t stack up in the eyes of the credit card issuer it’s a waste of valuable time to apply.
To assess your creditworthiness, the credit card issuer conducts a deep dive into your business and your personal financial history. The credit card company is trying to gauge your ability to pay back the money you will spend on the card. Here’s a list of what a credit card issuer looks at when determining your eligibility and credit limit.
- Business name, structure, and industry type: Banks want to verify that you have a viable business if they’re going to issue credit to you. As a result, credit card companies require basic information about your business including its name, how it’s set up, and what industry you’re operating in. If your company is structured as a corporation, partnership, LLC, nonprofit, or sole proprietor, you’re eligible to apply for a business credit card.
- Years in business and employee count: The credit card issuer wants to know how long you’ve been in business and the number of employees you have before extending credit. The more established and financially sound the business is, the easier it is to get approved.
- Annual revenue and expenses: The last thing a bank or credit card wants to do is extend your business credit only for it to go unpaid. That is why they require you to disclose your annual revenue and the amount you expect to spend each month on the business credit card. They look at your business’s revenue to determine how much credit it can handle; the more revenue you have, the larger the credit limit tends to be.
- Other income: If you have additional sources of income that will help you prove your business’s creditworthiness, you can list that on your application as well.
- Business credit score and personal credit score: Depending on how long you’ve been in business and your revenue, the credit card company may look at both your business and personal credit scores. They want to ensure you have behaved responsibly with other creditors. If you have excellent credit, you’ll get the best rate. Poor credit may preclude you from being eligible for a business credit card. [Read related article: Business Financing Options for Every Credit Score]
- Personal guarantee: To give your business credit, the credit card company wants assurances it will be paid back. As a result, most business credit card issuers require a personal guarantee. It states that if your business doesn’t pay the debt back, you are personally on the hook. “Building business credit through credit cards is an effective way to reduce or eliminate the need for personal guarantees when seeking credit in the future,” noted Bond.
[Don’t think a business credit card is right for you? Check out our review of small business loan and financing options.]
How to improve your chances of being approved for a business credit card
One of the biggest factors in determining your eligibility for a business credit card is your personal and/or business credit score. If you are running an established business with multiple years in operations and strong revenue, the credit card company will look at your business credit score alone. But if you are just starting out, or don’t have a business credit history, your personal credit score is going to weigh heavily on the approval outcome.
“Some applicants may not have established business credit, in which case decisions are based on their personal credit,” said Arellano.
Either way, there are three steps you can take to improve your odds of getting a business credit card if you’ve been turned down before.
1. See what needs improvement.
Credit scores are based on how you handle debt. If you have late or missed payments, too many accounts open and more debt than income, it can have a negative impact on your credit score.
If you were turned down for a business credit card the bank or issuer will list the reasons you were denied. Armed with that information you can begin to make changes that will improve your credit scores. That means paying your bills on time and reducing the amount you owe.
“Paying off financial obligations demonstrates better financial responsibility and is reflected in higher scores. This is one of the more important elements in strengthening your business credit profile,” said Bond.
2. Don’t close credit card accounts.
Paying off your debt is a surefire way to boost your credit score, but don’t close those accounts once you do. Your credit scores are based on your history of positively maintaining your accounts. The more accounts you have with no balance due on them, the better you look in the eyes of the credit scoring bureaus.
If you close paid-off accounts, the available credit limit goes away. Any balances on other credit cards will then represent a higher percentage of the total available credit, which can lower your credit score.
3. Pore over your credit report.
Just like your personal credit reports are publicly accessible, so are your business credit reports. It’s important to pour over both to spot any potential errors or to pinpoint ways to improve your credit score. It can also help you get the best interest rate on your business credit card.
“Not only can your business credit report help you get a sense of your borrowing potential, it helps you position yourself to negotiate the best terms and rates for your business,” said Arellano. “Now more than ever, it is important for business owners not to only monitor their consumer credit profiles, but also to stay on top of and understand what impacts their business credit score.”
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