Small business owners, for better or worse, tend to finance purchases using credit cards. When you were first starting out, you probably charged many business purchases to your personal credit card.
Applying for a business credit card has a lot of advantages, both for your personal credit score and for your business. Still, there are cases in which charging business purchases to a consumer card actually benefits your company.
Let’s take a look at how credit cards are different, examine different credit card aspects and determine whether business or consumer cards are superior. In the end, it’s not an either/or choice but one that depends upon your strategy.
Credit Limits
Winner: Business credit cards
Starter consumer credit cards usually begin with $500 credit limits. If you build a good credit history and provide proof of amazing income, your credit limits can soar up to as much as $35,000. Small-business cards start with higher limits — usually between $1,000 and $5,000 — and can increase to as much as $100,000 if you build a solid business credit history.
Rewards
Winner: Tie
Both consumer cards and business credit cards provide cash back rewards as well as points for airline travel, dining and lodging. The Capital One Spark line of business credit cards, for example, offers either cash back or travel rewards. With a Spark Cash Card, you get unlimited two percent cash back plus a one-time bonus of up to $500.
Spark Miles Cards offer unlimited double miles on airline travel and up to 50,000 bonus miles. Whichever card you use, pick the rewards program that will help you shave the most off your business expenses.
Financing
Winner: Consumer credit cards
Consumer credit cards get all the protections offered by the Credit Card Act of 2009. You get a 21-day grace period, 45 days advance notice of rate changes, and no rate hikes unless your minimum payment is 60 days overdue.
Although a few business credit card issuers, like Bank of America, extend Credit Card Act protections to their business cards, most banks do not. For this reason, many small business owners charge large purchases to a consumer card and smaller incidentals to their business cards. In a worst case scenario, if your business had to miss a credit card payment, you wouldn’t experience an immediate interest rate hike with a consumer card.
Credit Reporting
Winner: Business credit cards
When you initially apply for a business credit card, the issuer will pull your credit report and check your FICO score. After you receive your card and start making purchases, however, your business credit card activity won’t affect your personal credit report. The advantage is that carrying a large balance on a business card won’t hurt your personal credit score. The downside is that good business credit won’t help your credit score recover if you have lackluster personal credit.
One thing you might not know about business credit cards is that they can be used for personal purchases. If your personal cards are maxed out or if you have a compelling reason not to use them, you can charge personal items to your business cards. Just remember that compulsively raiding your business credit card for personal purchases could have serious long-term consequences for your company. Charging personal expenses to a business card should be a strategic decision that won’t bring harm to your family or employees.
Although business credit card activity isn’t reported to the three consumer credit bureaus unless you can’t pay, a business credit card doesn’t shield you in case of default. If your company goes belly-up and you can’t pay off your business card, creditors will come after your personal assets.
Expense Control
Winner: Business credit cards
Businesses with great credit ratings can opt for charge cards rather than credit cards with limits. With a charge card, you can spend as much as you need to spend, provided that you pay your balance in full at the end of the month. Also, as a value-added service, many business credit card providers send quarterly expense reports to your company. These reports help you see what you’re charging to your card, how much you’re spending, and whether you need to reallocate your budget.
| Aspect | Winner | Comparison and Benefits |
|---|---|---|
| Credit Limits | Business credit cards | Starter consumer cards usually begin with $500 credit limits. In contrast, small-business cards offer higher starting limits (between $1,000 and $5,000), with potential increases up to $100,000 based on solid business credit history. A boon for growth and financial flexibility. |
| Rewards | Tie | Both consumer and business cards offer cash back and points for travel, dining, and lodging. The Capital One Spark line of business cards gives cash back or travel rewards, with a Spark Cash Card offering unlimited two percent cash back and a one-time bonus of up to $500. |
| Financing | Consumer credit cards | Consumer cards receive protections under the Credit Card Act of 2009, including a 21-day grace period, advance notice of rate changes, and limited rate hikes. While some business cards offer these protections, many don't. Hence, consumer cards provide safety for large transactions. |
| Credit Reporting | Business credit cards | Business card activity doesn't impact personal credit reports, separating business and personal credit. However, strong business credit doesn't aid personal credit recovery if personal credit is weak. Using business cards for personal expenses requires strategic consideration. |
| Expense Control | Business credit cards | Businesses with excellent credit ratings can opt for charge cards, offering spending freedom with full balance payment. Many business card providers send quarterly expense reports, aiding expense management. Charge cards offer unparalleled control and transparency for financial planning. |
Building Business Credit with Business Credit Cards
Using business credit cards strategically is a pivotal step in building and enhancing a business’s credit profile. Unlike personal credit cards, the activity on business credit cards is typically reported to commercial credit bureaus.
This reporting plays a crucial role in establishing a business credit history. A robust business credit profile can be instrumental in unlocking more favorable financing terms, larger loan amounts, and better credit conditions in the future.
The business credit score, separate from the owner’s personal score, reflects the creditworthiness of the business itself. Regular, responsible use of a business credit card, such as timely payments and maintaining a low credit utilization ratio, positively impacts this score.
This in turn can lead to increased trust from lenders and vendors, potentially leading to reduced interest rates and better trade terms.
Furthermore, a strong business credit profile can be particularly advantageous during periods of expansion or when seeking investment. Investors and financial institutions often review a business’s credit history as part of their due diligence.
An impressive business credit score can thus significantly enhance a business’s appeal to potential investors and partners.
Personal Liability and Credit Protection
When it comes to credit cards, understanding the nuances of personal liability and credit protection is vital for business owners. Most business credit cards require a personal guarantee, which means that the business owner is personally responsible for any debt incurred.
This aspect blends the line between business and personal financial liability, making the business owner personally accountable in the event of non-payment or default.
In contrast, personal credit cards come with a range of consumer protections under various laws, such as the Credit Card Act of 2009. These protections include fraud protection, error dispute resolution, and restrictions on interest rate hikes.
Business credit cards often lack these comprehensive consumer protections, potentially exposing the cardholder to higher risks.
The personal guarantee on business credit cards also means that any default on the card could impact the business owner’s personal credit score. Therefore, it’s essential for business owners to be cautious and strategic about the use of business credit, especially in scenarios where there’s a risk of default.
Integrating Business and Personal Credit Cards into Financial Strategy
Incorporating both business and personal credit cards into a small business’s financial strategy requires a balanced approach. Each type of card offers distinct advantages that can be leveraged for different financial needs and goals.
Business credit cards should primarily be used for business-related expenses. They are instrumental in building business credit and can offer higher credit limits and business-specific rewards.
Their usage should be aligned with business activities such as purchasing inventory, paying for services, or covering travel expenses related to the business.
Personal credit cards, on the other hand, are more suitable for personal expenses and offer stronger consumer protections. They can be beneficial for emergency expenses or when personal consumer protections are desired.
However, it is crucial to maintain a clear separation between personal and business expenses for tax and legal purposes.
Integrating both types of cards into a financial strategy also involves understanding the impact of each on credit scores and liability. Balancing their use while keeping an eye on the overall credit profile of both the business and the business owner is key.
Regular monitoring, disciplined spending, and timely repayments are essential practices to ensure that both personal and business credit health are maintained.
In conclusion, the strategic use of both business and personal credit cards can offer comprehensive financial flexibility and security for a small business. The key is to leverage the strengths of each type of card in a way that aligns with the business’s financial goals and operational needs.
Frequently Asked Questions
Why should small business owners consider using credit cards for financing?
Small business owners often utilize credit cards for financing due to their accessibility and convenience. In the early stages, many entrepreneurs charge business expenses to personal credit cards. However, applying for a business credit card offers benefits for both personal credit scores and the business itself. Nevertheless, certain scenarios warrant using consumer cards for business expenses.
How do credit limits compare between business and consumer credit cards?
Business credit cards generally provide higher credit limits compared to starter consumer credit cards. While consumer cards may start with limits around $500 and can go up to $35,000, business cards typically begin between $1,000 and $5,000. With a solid business credit history, business credit limits can extend to as much as $100,000, offering more flexibility for business expenses.
What about rewards and benefits?
Both business and consumer credit cards offer rewards in the form of cash back, points for travel, dining, and lodging. The choice between the two depends on the specific rewards program that aligns with your business needs. Some business cards, like the Capital One Spark line, provide cash back or travel rewards, empowering you to reduce your business expenses effectively.
How does financing differ between business and consumer credit cards?
Consumer credit cards offer certain protections under the Credit Card Act of 2009, including grace periods and advance notice of rate changes. While some business credit card issuers extend these protections, most do not. Consumer cards may be preferable for large purchases due to these safeguards, as immediate interest rate hikes are less likely.
How does credit reporting impact these cards?
Upon applying for a business credit card, your credit report is checked, but the activity won’t affect your personal credit report. This distinguishes business credit card usage from personal credit card use. However, be cautious when using business cards for personal expenses. While business credit card activity isn’t usually reported to consumer credit bureaus, personal assets might be at risk in the event of default.
Can business credit cards be used for personal purchases?
Yes, business credit cards can be used for personal purchases if necessary. Yet, this should be a strategic decision to avoid long-term consequences. Keep in mind that misusing business credit cards for personal expenses could impact your company negatively. Additionally, business credit cards don’t offer complete protection against default; creditors might pursue personal assets if business debts can’t be repaid.
How do business credit cards assist with expense control?
Businesses with strong credit ratings can opt for charge cards instead of credit cards with limits. Charge cards allow spending as needed, provided the balance is paid in full monthly. Many business credit card providers offer quarterly expense reports, aiding businesses in monitoring expenditures and reallocating budgets effectively.
Ultimately, the decision between business and consumer credit cards depends on your business strategy, credit situation, and financial goals. Each type has its advantages, and making the right choice ensures prudent financial management and growth.
Conclusion: Navigating Business and Consumer Credit Cards
The Strategic Importance of Credit Card Choice
- Impact on Business Journey: Choosing between business and consumer credit cards significantly affects your financial strategy.
- An Important Decision: This decision shapes your financial landscape and aligns with your business goals.
Advantages of Business Credit Cards
- Financial Flexibility: Higher credit limits offer the leverage needed for growth and expansion.
- Dynamic Business Tool: Suitable for businesses aiming to seize new opportunities and fuel their growth.
Consumer Credit Cards: Safety and Transparency
- Protective Measures: Consumer cards come with safeguards for significant transactions, offering financial security.
- Credit Card Act of 2009: Provides added protection and predictability, crucial for managing larger expenses.
Rewards Programs: Aligning with Business Needs
- Diverse Benefits: Careful evaluation of rewards programs can lead to savings and advantages.
- Tailoring to Your Needs: Select programs that best align with your specific business requirements.
Financing and Credit Reporting
- Consumer Card Safeguards: Offers protection against potential financial risks.
- Separating Personal and Business Credit: Managing credit activities to protect personal credit score.
Making an Informed Decision
- Strategic Balancing Act: Wisely using business credit cards for personal expenses requires careful decision-making.
- Sculpting Your Financial Future: Analyze all aspects, including credit limits, rewards, and reporting, to make an informed choice.
The decision to use business or consumer credit cards is more than a mere financial choice; it’s a strategic move that impacts the entire course of your business.
Understanding the advantages and protections offered by each type of card allows you to make decisions that are not just about immediate transactions but about the broader financial health and growth of your business.
By considering factors like credit limits, rewards, and credit reporting, you can select a credit card option that not only meets your current business needs but also supports your long-term financial aspirations.
Credit Card Photo via Shutterstock
This is a really good summary. I always have just been putting business purchases on the business card and personal expenses on the personal card to that at tax time is was easier.
Love the clear format. I wish I didn’t need credit cards, but alas they’re a necessary evil.