Disclosure: TRUiC has partnered with CardRatings for our coverage of credit card products. TRUiC and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are TRUiC’s alone, and have not been reviewed, endorsed or approved by any of these entities.

HOW TO USE A SMALL BUSINESS CREDIT CARD TO HELP FINANCE YOUR STARTUP

When compared to other forms of financing, credit cards—with their steep interest rates, severe late fees, and short grace periodsdo not sound like the best way to help launch your startup. Why, then, are there credit cards specifically designed for this process?

The answer is simple: with the proper planning and patience, it can be lucrativeIn this guide, we will show you the best way to bridge the gap between profitable idea and profitable company using small business credit cards.


WHAT IS A SMALL BUSINESS CREDIT CARD?

You can certainly use a personal credit card to run your business, but a small business card has features your personal card doesn’t. For instance, small business cards can give you cash back on purchases of office supplies and other rewards that a startup needs. They also offer online tools to make tracking your business expenses easier, and they make it easy to add other users, while also restricting their access.

Small business cards are different than what is known as corporate credit cards. With a small business credit card, you’re personally liable for the bills. That means if your startup fails, you’re responsible for paying it all back.

With a corporate card, only the company is liable for the debt. And because a business entity is responsible for repayment of a corporate card, a company must have a substantial credit history to open this type of account. So a corporate card is not an option for most startups.

5 ADVANTAGES OF A SMALL BUSINESS CREDIT CARD

Because these cards are tailored to business owners, you’ll get features that fit your business needs that you won’t get with a personal credit card. These benefits include:

1. HIGHER CREDIT LIMITS

Depending on your credit score, you might start with a limit of $10,000, which can eventually grow to $100,000. Some even let you exceed your limit under certain conditions.

2. TARGETED REWARDS

What good are rewards programs if the points can’t be used on what you need? Small business credit cards know what you want, far beyond just flights and fuel.

Some offer up to multiple points per dollar you spend at office supply stores and for shipping. Others do the same for phone, cable, and internet services. You can even find cards that offer up to one year of free access to ZipRecruiter and Google G Suites. So suffice to say, if you have specific business needs, you can probably find a card that will reward you in those categories.

3. SIGNIFICANT SIGN-UP BONUSES

As with the rewards, the sign-up bonuses are aimed squarely at what business owners need. Alas, like rewards, the options are dizzying and require some research to find the cards that are just right for you.

These sign-up bonuseswhich can come as points, miles or cash backcan be worth hundreds and even thousands of dollars. But take note: The cards with the better sign-up bonuses will typically come with higher annual fees.

Recommended action box icon

Recommended: Check out our list of the 5 best small business credit cards for financing your business.

4. BUILDING YOUR BUSINESS CREDIT HISTORY

A small business credit card can bolster your business’s credit score just like your personal card establishes your personal credit score. The longer you make timely payments and stay under your credit limit, the more likely you’ll eventually qualify for other forms of credit at excellent interest rates. Of course, if you make your payments late or carry a lot of debt, this advantage becomes a liability.

5. ORGANIZING YOUR BUSINESS EXPENSES

A separate card for your business not only helps you track your spendingespecially useful at tax timemost small business cards offer robust online record-keeping tools that make it easy to analyze where your money is going. As your business grows, you can add authorized users, and some small business credit cards allow you to set spending limits for them.

5 DISADVANTAGES OF A SMALL BUSINESS CREDIT CARD

First: the interest rates. That zero-percent rate doesn’t last forever. You need to budget at the start for the end of the introductory period. Because credit cards have higher interest rates than other business financing options, they work best for short-term financing and spending smaller amounts.

Second, a credit card isn’t a loanyou don’t get cash to spend as you please and need. A cash advance on any credit card comes with steep fees and interest charges, with no grace period on repayment. Avoid this at any cost, or it’ll cost you.

Third, as we mentioned before (and it bears repeating), you’re personally liable for the debts on your small business credit card. There’s no corporate shield protecting you.

Fourth, while the rewards are targeted to business users, they will generally offer less significant overall value than the most robust personal cards. In other words, you’ll get more of the rewards you need, but in terms of the sheer number of points, you’ll find them lacking.

Fifth, small business cards don’t have to offer the same protections and perks as personal cards. The CARD Act of 2009 only applies to personal credit cardswhich means business cards can change interest rates more often if they wish. Practically speaking, the issuers of almost all small business cards follow the same policies as on their personal cards. But it’s still something worth checking out in their terms and conditions.

ALTERNATIVES TO A SMALL BUSINESS CREDIT CARD

Before we get into the actual features of the cards themselves, let’s compare them to the other forms of financing out there:

BUSINESS LOANS

Whether through a bank or the Small Business Administration, the paperwork for a business loan is formidableif you qualify in the first place. You’ll likely be asked to provide:

  • Personal credit reports
  • Business credit reports
  • Income tax returns
  • Financial statements
  • Bank statements
  • Collateral

Even if you qualify, these loans can take 60 or even 90 days to process for approval. Meanwhile, you can secure a small business credit card in a matter of days (we’ll talk more about that in a moment).

When you secure a business loan, you borrow a fixed amount and pay it off in installments. But what if you need to borrow more? Well, you have to apply for another loan. But a small business credit card is a revolving line of credit. That means, as long as you make the minimum monthly payments on time, you can use that line of credit again.

Of course, bank and SBA loans have much lower interest rates. We’re talking about an annual percentage rate of around 4.5 to 4.9 percent, compared to 13.5 to 25 percent APR for a small business credit card. And these cards have a variable instead of fixed APRwhich, as the term implies, means your interest rate can go up. The bottom line is, you’ll never get a comparable interest rate on a credit card that you will on a bank or SBA loan.

Also, the best small business cards offer a zero-percent introductory APR on purchases and balance transfers for the first 12 months. Good luck finding a loan that offers that.

FAMILY AND FRIENDS

Books have been written and movies have been made about the pitfalls of relying on friends and family for startup capital. But if you can do it, go for it.

For many of us, however, our friends and family have neither the money nor the patience to help us launch a business and bring it to profitability. Once again, this is about controlling your own destiny. Managing small business credit cards can be a chore, but it’s still your chore. So let’s get down to the details.

TIPS FOR GETTING AND USING A SMALL BUSINESS CREDIT CARD

Any legal, registered business owner can applyand that includes freelancers, independent contractors, and even someone who sells goods for a product. It’s simple. Most often, you just need your business name, business address, annual sales, years in business, and either EIN or Social Security number.

Whether you’ve been in business a while or are just starting out, you can still get approved. New owners are judged more on their personal credit than on their business, and if it’s a side hustle, you’ll have to show income from both your main job and side gig.

Like anything else in your business, you need to shop aroundand not just for the best rewards and bonuses that suit your needs. As a business owner, you know how important it is to read the fine print. So study the terms and conditions for all fees and penalties. Factor those into your decision.

Most importantly, none of these savings will matter if you don’t pay your balance in full and on time. Taking advantage of a month-long float and a raft of perks will be canceled out by the interest payments you’ll shell outwhen that cash should be re-invested in your business.

Editorial disclaimer: The content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. All opinions expressed here are the author's alone.

ADVERTISING DISCLOSURE

TRUiC has partnered with CardRatings for our coverage of credit card products. TRUiC and CardRatings may receive a commission from card issuers.