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What Is a Business Credit Card & How Does It Work?

Author: Chandra Dhopatkar
Published: 03/04/2024 4:16 p.m. EST
Last Update: 03/11/2024 12:03 p.m. EST
Edited by: Jennifer Bonilla

To understand what is a business credit card and how it works, you’ll want to take note of the words “business” and “credit card”. In the same way a personal credit card is issued to an individual, a business credit card is issued to a business. And, just like an individual uses a credit card for personal expenses, a business uses a business credit card for business expenses.

Business credit cards help businesses:

• Build business credit which unlocks numerous other benefits for the business.
• Prevent piercing the corporate veil and protect the business owner’s personal assets in case of lawsuits.
• Manage and track finances more effectively.
• Enhance cash flow to maintain operations during slow periods or capitalize on growth opportunities.
• Reduce expenses and save money by taking advantage of incentives such as cash-back, airline miles, hotel points, vendor discounts, and gas rebates offered by business credit cards.

Recommended: Bill is an easy to qualify for small business credit card to build business credit. 

What Is a Business Credit Card

A business credit card is a type of card specifically designed for business use rather than personal use. Unlike personal credit cards, issued in the name of a person, business credit cards are issued in the name of a business. 

Key features that distinguish business credit cards include higher credit limits, specialized reward programs tailored to business needs (such as travel, office supplies, or telecommunications services), and tools for expense management and reporting.

They also help in separating personal and business expenses, making accounting and tax preparation easier. They also prevent businesses from piercing the corporate veil so if the person or business is sued, the other won’t be held liable. 

Recommended: Read our guide on Net-30 Credit Cards.

How Business Credit Cards Work

Understanding how business credit cards work is essential for small business owners and entrepreneurs wanting to build business credit. These financial tools not only offer a line of credit to support various business activities but also come with unique features and requirements distinct from personal credit cards.

Let’s explore the fundamentals of business credit cards, including how they operate, the benefits they offer, and important considerations like the personal guarantee and credit card accountability. 

Additionally, we will look into how to apply for a business credit card, manage business spending, and leverage the advantages of employee cards. 

Whether you are looking to get a business credit card or simply want to understand your current card better, this section will provide valuable insights into making the most of your business’s financial resources.

Line of Credit:

A business credit card offers a line of credit, allowing businesses to borrow funds up to a certain limit to cover operational expenses.

This line of credit can aid in managing cash flow by providing a cushion for times when income is irregular.

However, it’s essential to be aware of the credit limit and ensure that the spending aligns with the business’s ability to repay.

Making Purchases:

Businesses use credit cards to streamline the purchasing process, enabling them to acquire goods and services necessary for their operations.

This can include inventory, office supplies, or even capital expenses.

The centralized recording of transactions simplifies expense tracking and financial management.

Payments and Statements:

Business credit card holders receive monthly statements detailing their transactions, outstanding balance, and the minimum payment due.

Timely payments must be made to avoid interest charges and late fees. Understanding the statement and managing the card’s use effectively can help avoid unnecessary fees.

Credit Card Issuers and Offers:

Discover the various card issuers in the market, such as Chase Ink Business, and compare their offers to find the best business credit card for your needs.

Understand the factors that influence the availability and terms of credit cards for new businesses, including interest rates, fees, and rewards programs.

Personal Guarantee and Liability:

Explore the concept of a personal guarantee and how it affects your responsibility regarding business card debt. Understand the implications for your personal credit score and financial wellbeing, as well as strategies to mitigate personal risk.

Credit Card Accountability and Protection:

Gain insights into the Credit Card Accountability Responsibility and Disclosure (CARD) Act and how it applies to consumer credit but may differ for business credit cards. Learn about the protections and responsibilities for both cardholders and credit card issuers.

Employee Cards and Spending Management:

Understand how to manage business spending by issuing employee cards, setting limits, and tracking expenses. Learn the benefits and potential pitfalls of providing cards to employees and strategies to ensure they are used responsibly.

By addressing these areas, the article will provide a comprehensive overview of business credit cards, helping small business owners and new business entrepreneurs navigate their credit options effectively and responsibly.

How to Apply for a Business Credit Card

Applying for a business credit card is a strategic step for any business owner looking to manage finances more efficiently, separate business expenses from personal expenses, and build a business credit history.

A business card often comes with benefits such as higher credit limits than personal cards, rewards tailored to business spending, and valuable financial management tools.

Follow these steps to get a business credit card. They highlight how to leverage the benefits of a business card while maintaining a clear distinction from your personal card. Whether you’re making everyday business purchases or looking for a way to manage larger business expenses, understanding how to apply for and use a business credit card can be crucial for your company’s growth and financial health.

1. Evaluate Your Business Needs and Creditworthiness

Before applying for a business credit card, assess your company’s financial situation and how a card can meet your needs. Consider if a higher credit limit is necessary for your business expenses or if the benefits of a business credit could aid in managing cash flow and rewards. Review your personal and business credit scores, as these will influence your eligibility and the terms of your credit card.

2. Research and Compare Card Offers

Look into various business card issuers and compare the best business credit options. Focus on cards that offer a higher credit limit and rewards that align with your spending habits, such as cash back on office supplies or travel points for business trips. Consider the annual fee, interest rates, and additional benefits like free employee cards.

3. Gather Necessary Documentation

When preparing to get a business credit card, compile all required documentation such as business financial statements, tax ID numbers, and personal income information. This step is crucial, especially if the card issuers report to business credit bureaus, as it can affect your business credit history.

4. Complete the Application

Fill out the business credit card application with your business and personal information. Accuracy is key to avoid delays or rejections. Understand that applying for a business card is similar to applying for a business loan and may require a personal guarantee, affecting your personal credit history.

5. Understand the Terms and Personal Guarantee Requirement to Get a Business Credit Card

Before submitting your application, ensure you fully understand the credit limit, interest rates, and the requirement for a personal guarantee. Knowing these terms can help manage your business finances better and ensure that the card serves as a beneficial business tool rather than a liability.

6. Wait for Approval

After applying, there may be a waiting period. During this time, card issuers may verify your information and decide on your credit limit based on your business and personal credit history. Patience is key during this stage.

7. Set Up Your Account and Start Using Your Card

Once approved, activate your business credit card, set up any necessary online accounts, and begin using the card for your business expenses. Remember, responsible use, especially in the initial months of card membership, can significantly impact your business credit score and future financial opportunities.

8. Regularly Review Your Account

Regular monitoring of your account helps you stay on top of your spending, manage your credit limit, and make timely payments. It’s essential for maintaining a good business credit history and ensuring that your business card remains a valuable asset for your company.

Benefits of a Business Credit Card

Owning a business credit card comes with many advantages important for the financial health and operational efficiency of a company. Here’s how these benefits unfold:

Building Business Credit:

The regular and responsible use of a business credit card is instrumental in building a solid business credit history.

Unlike personal credit cards, business credit cards often cater specifically to the needs of companies, helping establish and enhance creditworthiness. This is vital for securing future financing under more favorable terms.

By utilizing your card to settle net-30 invoices, your business can secure tradelines with credit bureaus: one from the net-30 vendor and another from the credit card issuer.

This strategy is beneficial as both timely payments contribute positively to your business’s credit profile, significantly boosting your credit-building efforts and enhancing your company’s financial reputation and business credit score.

Separating Business and Personal Expenses:

A fundamental rule in business financial management is separating personal and business finances. A business credit card is a card intended specifically for company use, simplifying record-keeping and enhancing financial oversight.

This clear separation aids in accurate tax reporting and streamlines the accounting process, making it easier to monitor and manage business expenses.

By utilizing a separate credit card for business transactions, you not only adhere to best practices in financial management but also ensure that business cards don’t get mixed up with personal expenses, which can complicate financial records and potentially lead to personal liability for business debts.

In essence, business credit cards provide a reliable and efficient means to manage company finances, offering benefits that apply directly to business needs.

By learning how business cards work and implementing them wisely, a business owner may significantly mitigate financial risks and improve operational efficiency.

These cards often come equipped with features tailored to business use, making them easier to manage than personal cards and invaluable tools in maintaining clear financial boundaries between personal and business expenditures.

Potential Rewards and Benefits

Business credit cards can be great for your company. Here’s why:

• Cash Back: Earn cash back on things you buy for your business.
• Travel Points: Get points for business travel, which can save you money.
• Discounts: Enjoy discounts on stuff you need for your work.
• Credit Card Can Help Manage Cash Flow: It helps you control when you spend and when you pay.
• New Business Credit: A good way to start building your business credit.

These cards are generally easier to manage than personal ones because they’re made for business use.

Potential Downsides

But, there are some downsides to watch out for:

• Credit Card Debt: It’s easy to spend too much and get into debt.
• Interest Charges: If you don’t clear your bill each month, you’ll face extra charges.
• Like Personal Credit Cards: You need to be careful with spending and paying back on time.
• Separating Your Business and Personal Expenses: It’s important to keep your business and personal spending apart.

Make sure to use the card wisely to avoid these issues. Business credit cards should help your business, not make things harder.

Conclusion

A business credit card can be a valuable asset for handling your company’s buying needs, improving your credit, and providing more financial freedom. But, it’s important to use it wisely to steer clear of problems like too much debt and big interest fees. When picking and using a business credit card, think about what your business needs, how you spend money, and how you’ll pay it back.

Remember, a card might be just the tool you need to help your business grow, but only if used correctly. Business credit cards are easier to manage when you have a clear plan for how they apply to your business. Talk to financial advisors and do your research to find the right card for you. With so many business credit options available, taking the time to choose carefully will pay off.

FAQs

How can a business card help manage business expenses?

A business card is a credit card intended specifically for use by a business, not just an individual. These cards help manage business expenses by allowing for the separation of personal and business finances, which is crucial for accurate accounting and tax purposes. Business credit cards typically come with tools designed to track spending and categorize expenses, making them beneficial to your business. Additionally, they can streamline the process to buy necessary goods and services, ensuring that business funds are used appropriately.

What are the advantages of having a higher credit limit with a business card compared to a personal card?

The advantages of having a higher credit limit with a business card as opposed to a personal card are significant, especially since business credit cards usually come with higher credit limits than personal credit cards. This higher limit is crucial for businesses that need to make large purchases or manage unexpected expenses. Furthermore, business cards offer more flexibility and can help in maintaining a healthy cash flow, which is essential if the business can’t pay immediately due to variable income.

How does the credit limit on a business card differ from a personal card?

The credit limit on a business card typically exceeds that on a personal card because business credit cards are designed to accommodate the larger financial needs and spending patterns of a business. These cards often come with higher credit limits to support business operations and investments, providing a financial buffer that can be crucial in managing cash flow and facilitating business growth. Additionally, this higher credit limit can be beneficial when a business faces unexpected expenses or when managing monthly expenditures.

What should I look for in the best business credit card for my company?

In the best business credit card for your company, look for features that align with your business’s spending habits and financial goals. Business credit cards typically offer rewards and benefits that can be beneficial to various types of business expenditures. Additionally, the best business credit card agreements will detail transparent terms and provide a clear understanding of fees, interest rates, and credit limits. Many business cards also offer added perks like travel rewards or cash back on everyday purchases, making them more beneficial than consumer credit cards for business use.

How do higher credit limits than personal cards benefit business owners?

Higher credit limits than personal cards benefit business owners by offering more significant financial flexibility and the ability to manage larger business expenses without depleting cash reserves. This is particularly important for businesses that experience fluctuating cash flows or need to make substantial investments to grow. By using business credit cards wisely, owners can also build a positive business credit history, which can be beneficial when applying for business loans or additional credit in the future.

Why is it important to separate business expenses from personal expenses?

Separating business expenses from personal expenses is crucial for clear financial management and accurate tax reporting. A business credit card facilitates this separation by providing a dedicated tool for all business-related purchases, thus simplifying accounting processes and ensuring that personal and business finances do not intermingle. This distinction is not only beneficial for bookkeeping but also essential in maintaining professionalism and clarity in financial dealings, especially if the business faces financial scrutiny or audits.

What features should I compare when choosing the best business credit card?

When choosing the best business credit card, compare features such as credit limits, rewards programs, interest rates, and fees. Business credit cards typically offer specialized benefits that can include cash back on office supplies, travel rewards, or discounts on business services. Additionally, consider whether the card issuers may require a personal guarantee, which could impact your personal credit. The ideal business credit card should align with your spending patterns, offer financial flexibility, and contribute positively to your business’s financial health.