Most startup businesses require some amount of funding to get off the ground. One option is a business credit card, which offers a number of benefits over personal cards, including the opportunity to access various company discounts and rewards. In fact, according to one report, 31% of small business owners utilized credit cards in the last year.
While it’s true that all credit cards offer users enhanced buying power and access to cash flow, small business owners must realize that not all cards are the same. Further, applying for a card with a credit line that’s too big can trigger you to borrow too much and, ultimately, fall behind on your payments.
The savviest entrepreneurs take their time and do their research before deciding which card is the best fit for their needs.
Preparing to Apply for Credit
The rewards that accompany certain business credit cards can make them alluring to borrowers. Individuals that own businesses, however, shouldn’t rush to apply for credit without taking some precautions. Here are some key ways you should prepare before applying for a card.
Boost Your Personal Credit Score
Before applying for a business credit card, it’s wise to take steps to enhance your own personal FICO score. If your company is new or lacks a solid borrowing history, the card issuer will likely take your personal credit into account. Boosting your personal credit score into the 700s or above can help ensure you qualify for a card with the desired rewards.
Register Your Company
It’s only natural that credit card companies want to lend to businesses that seem trustworthy. Before applying for a card, it’s wise to take steps to improve credibility. For example, you could register your company with the Small Business Financial Exchange or open a separate checking account for business transactions. Doing this shows your company is an established entity and not a fly-by-night organization.
Choosing the Right Business Credit Card
Choosing the right credit card for your business ensures that you have the borrowing power you need and prevents you from racking up unnecessary debt. Here are five key questions to ask before applying for a business credit card.
1. Why Do I Want a Credit Card?
Before sending out a rash of credit card applications, business owners should take the time to assess their motives. After all, your reasons for wanting credit will determine which card is most appropriate.
Generally, borrowers who plan to carry a balance from month to month will benefit most from cards with low interest rates. On the other hand, those who can pay their bills in full should prioritize any possible reward programs.
Along with enhanced buying power, one of the most common reasons to use a business credit card is to make use of the various rewards programs. For example, a business credit card may offer low interest rates, no annual fees, travel points or discounts on supplies. Entrepreneurs should take time to determine which rewards program best fits their specific spending habits and business type.
2. Is There a Grace Period?
If you do anticipate carrying a balance or struggling to make the minimum payment each month, it’s important to ensure your card offers a grace period. Before applying for a business credit card, speak to the issuer about the terms of the grace period, or the amount of time granted before your debt starts collecting interest.
With business credit card interest rates averaging 12.85%, it’s only logical for business owners to seek out the maximum grace period on any new cards for which they apply.
3. What Rewards Does It Offer? What Penalties Are Levied on Borrowers?
The type of business you operate can affect what type of business credit card best suits your purposes. While cards offering airline miles may be tempting to many business owners, travel benefits may not be particularly helpful for companies that do most of their business locally. Instead, these companies should opt for rewards programs offering cash back benefits or discounts on business purchases.
Additionally, businesses should examine any potential fees and penalties. Some credit cards charge fees for cash advances, late payments and even balance transfers. If you anticipate using your card to keep business cash flowing, you may want to avoid cards that hit you with harsh penalties for doing so.
4. Where Will the Card Work?
Credit cards provide individuals and businesses with the purchasing power they need in various situations. Unfortunately, not all business credit cards function equally well in different situations. Before applying for a card, talk to the issuer (e.g., bank, credit union, etc.) to ensure the merchants you frequent will accept it.
Additionally, business owners who travel regularly should ensure that their new cards work overseas. The last thing you want is a card issuer that regularly switches off your account when you’re out of town or one that doesn’t offer EMV-chipped cards.
5. Will My Personal Credit Be Affected?
Many entrepreneurs opt to take out business credit cards rather than risk their personal FICO ratings. The truth is, however, that your business card could appear on your personal credit report. In the long run, drawing large amounts of money from certain business credit cards can cause your personal credit score to plummet.
Fortunately, some types of cards only report borrower information to the business credit bureaus. Choosing the right card option can help ensure your personal credit remains intact no matter what befalls your business in the coming years.
No business owner wants to devote hard-earned profits to paying off credit card debt. Do your research before applying for a business credit card to protect your company’s interests moving forward.
Once you have a business credit card, it’s imperative to maintain a stellar rating. Here are 10 easy steps to build your business credit.