Paper or Plastic: Should You Consider a Business Credit Card?

Over a third of small business owners still turn to credit cards for financing to meet their capital needs, according to the National Small Business Association 2014 Year-End Economic Report.

At 36%, the number who funded their businesses with credit cards over the previous 12 months increased 3 points between December 2013 and December 2014.

Additionally, small businesses are still feeling the credit crunch—the ability to acquire funding vs. the ability to hire. Though the number dropped a bit since mid-year 2014, 61% of the small businesses surveyed at the end of 2014 were still experiencing an impact. And the amount of small business owners who were able to obtain required financing was down three pointsover the prior six months, from 72% to 69%.

Think Before You Leap

This data reflects an ongoing credit card demand by small businesses that likely won’t be going away anytime soon. The need for a suitable credit card should be tempered with caution. The market is rife with offerings, but the terms and conditions, features and benefits vary greatly.

Moreover, since more than three quarters of the small businesses surveyed were carrying debt, the terms and rates offered by your credit cards are vitally important. This number decreased only slightly, from 80% to 76%, between the end of 2013 and December 2014.

One bright note in the NSBA Report was revealed when business owners were asked about the terms of the credit cards they used for their businesses. Over half believed their terms stayed the same over the past six months, while 19% thought they had gotten worse, which was down from 27% in the 2014 mid-year report. Equally important, only 11% were not sure, indicatinga growing awareness in business owners about the terms of their cards.

Considering the number of businesses using credit cards for business financing and those carrying debt, this is an important and positive trend. Now, more than ever, is the time to review credit card terms and determine whether you have the most suitable card for your small business. And if you don’t yet have a business-oriented credit card, but have determined that you need one, take stock of what you require and do the research to select the optimum card for your business needs.

Personal and Business Credit Cards vs. Corporate Credit Cards

With new small businesses, you will need to rely on your personal credit to obtain a credit card. But it’s a good idea to start taking steps right away to begin establishing business credit.

With no business credit, your choices are limited to personal credit cards and to small business credit cards that are designed for companies with an annual revenue of up to around $15 million, or those that employ up to 500 workers.

If you are looking to secure a bank loan for your business down the road, using a business credit card for your ongoing business expenses is a good method for building your business credit rating. Just be sure to use your card wisely and responsibly. With the ongoing credit crunch, this can be an important advantage for your business.

If your company has an established business credit rating and it’s in the mid-sized range, you should explore corporate card options. These types of company cards limit your personal liability.

Corporate credit cards also offer additional features that are tailored to your individual business. They go beyond the pre-packaged business card offerings that you see advertised so heavily.

Business Features

Business credit cards are designed to entice the “average” small business owner with features that are typically advantageous to a business owner.

Budgeting and Expense tracking tools

Purchase categorizing

Performance tracking tools

Custom Spending Limits for Employee Card Holders

Office Supply and Equipment rewards

Travel rewards

Gas rewards

Telecommunication rewards

Identify the features that are most beneficial for your business needs first, and then review the cards that support these requirements. Weigh those benefits against the card’s terms and conditions prior to making a decision. Resist being swayed by promises of big rewards. Allow your company’s needs to drive your decision, not marketing and hype.

Financing and Interest Rates

If you wish to secure a credit card to help fund your business, a low interest rate is essential. Business branded credit cards usually carry higher interest rates than personal credit cards. So, don’t limit your options to small business credit cards.

Consider the advantages of a business credit card and compare them against the use of a personal card and the consumer protections that accompany this option.

If you want to use credit cards for both financing and ongoing business expenses, consider carrying two cards. Select a card with an advantageous interest rate for your funding needs and choose a different card with cash back on purchasing categories that are most appropriate for your business expenses, as well as those cards that provide useful budgeting and expense tracking tools.

Credit Consumer Protections

Unlike personal credit cards, business credit cards are not protected under the Credit Card Act of 2009. Therefore, business card issuers can change your rates with no advance notice and no ability to opt out.

A possible solution is to obtain a personal credit card with good rates for your small business financing needs and use a business branded card for ongoing business expenses. However, a personal credit card typically offers a much lower credit line than a business card, limiting the amount of financing you may obtain via this method.

If you do choose to use a business credit card as your primary funding source, do extensive comparison shopping to obtain a good interest rate and to identify the card issuer most likely to offer and stick to comparative consumer protections, such as Bank of America.

Ultimately, there may be some light at the end of the tunnel through the implementation of the proposed Small Business Credit Card Act of 2013. Unfortunately, this key legislation is currently idling in committee and its chances of being enacted are rapidly dwindling. But for now, due diligence, restraint and ongoing monitoring will go a long way towardssound financial choices in your business credit card decisions.