What Is a Business Credit Card and Is It Right for You?

Navigating the financial landscape as a small business owner or startup entrepreneur can be challenging, with unending decisions to make. One tool that can significantly impact your financial management is a business credit card.

But what exactly is a business credit card, and is it the right choice for you? Let’s break down business credit cards by explaining what they are, how they operate, their advantages and disadvantages, and how to select the best one for your needs.

What is a business credit card?

A business credit card is a financial tool specifically designed to help business owners manage their expenses and cash flow more easily. Unlike personal credit cards, business credit cards tend to cater to the unique needs of businesses, providing features and rewards tailored to business spending habits. These cards can be used to make purchases, pay bills and earn rewards for everyday business expenses.

Business credit cards often offer higher credit limits than personal cards, enabling business owners to cover larger expenses and manage cash flow more effectively. Additionally, they provide an opportunity to separate personal and business finances, making it easier to track and manage business expenses. This separation not only simplifies bookkeeping, but also helps maintain clearer financial records for tax purposes.

Business credit cards can include various perks and benefits designed specifically for businesses, such as travel rewards, cashback on business-related purchases, and access to business tools and resources. These features can help small business owners and entrepreneurs save money and access valuable resources to support their growth.

How do business credit cards work?

Business credit cards function similarly to personal credit cards, with the primary distinction being their focus on business purchases and features. When you use a business credit card, you are essentially borrowing money from the card issuer to make purchases, which you then repay over time. The card issuer sets a credit limit, which is the maximum total amount you can borrow at any given time.

When you make a purchase using a business credit card, the transaction is added to your card balance. By the end of each billing cycle, you’re required to make at least the minimum payment. However, paying off the entire balance is advisable to avoid interest charges, which can accumulate quickly.

Many business credit cards offer rewards programs that allow you to earn points, miles, or cashback on eligible purchases. These rewards can be redeemed for travel, merchandise, statement credits or other options, depending on the card issuer’s offerings. Additionally, business credit cards often come with various features such as expense tracking tools, spending controls for employees and integration with accounting software, which can help streamline your financial management processes.

What are the pros and cons of a business credit card?

Pros

Business credit cards can offer a multitude of benefits for a small business owner.

Separate business and personal credit. One of the most significant benefits of a business credit card is the ability to separate personal expenses and business expenses. This separation can simplify bookkeeping and make it easier to track and manage business-related costs. Having distinct financial records for personal and business expenses is beneficial not only for tax purposes but also for maintaining a clear understanding of your business’s financial health.

Higher credit limits than personal credit. Business credit cards often offer higher credit limits compared to personal credit cards, providing more flexibility to cover larger expenses and manage cash flow effectively. This increased spending power is particularly valuable for businesses that experience fluctuations in revenue or require significant upfront investments.

Rewards and benefits. Additionally, business credit cards frequently come with rewards and benefits tailored to business spending patterns. These can include cashback on office supplies, travel reward points and discounts on business services. By utilizing these rewards, business owners can save money and enjoy additional perks that support their growth and success.

Build business credit history. Because your business credit card is tied to the business’s credit profile rather than your personal credit profile, business credit cards allow business owners the ability to build their business credit history by making on-time payments and maintaining responsible use of their cards. This can help a business in the long run if they’re having trouble qualifying for a larger small business loan.

Cons

Despite their advantages, business credit cards have potential downsides to consider.

Debt. One of the primary concerns is the risk of accumulating debt. If not managed carefully, high interest rates on outstanding balances can lead to significant financial strain, especially for new businesses with limited cash flow.

Possible personal liability. Another potential drawback is the possibility of personal liability for business debt. Many business credit card issuers require a personal guarantee, meaning that if the business is unable to repay its credit card debt, the owner may still be held personally responsible. This risk underscores the importance of prudent financial management and maintaining a clear distinction between personal finances and business finances.

Fewer protections. Business credit cards may not offer the same consumer protections as personal credit cards. While many issuers do provide some level of protection, such as fraud monitoring and zero liability for unauthorized transactions, it’s essential to review the terms and conditions of each card before account opening to understand the specific protections offered.

How does a business credit card affect your credit?

A business credit card can impact both your personal and business credit scores, depending on the lender’s reporting practices. Some issuers report business credit card activity to both personal and business credit bureaus, while others may only report to one or the other.

When applying for a business credit card account, many issuers will conduct a hard inquiry on your personal credit report, which can temporarily impact your personal credit score. Once approved, your credit utilization and payment history on the business card can also affect your personal credit score if the issuer reports to consumer credit bureaus.

Responsible use of a business credit card, such as making timely payments and maintaining a low credit utilization ratio, can help build your credit history. In contrast, late payments or high balances can harm your credit. To protect your credit, be diligent in managing your business card responsibly and monitoring your credit reports regularly.

How to Choose a Business Credit Card

Selecting the right business credit card is essential for maximizing your benefits and minimizing potential drawbacks. To find the best card for your needs, consider the following factors:

Evaluate rewards and benefits. Many business credit cards offer rewards and benefits. Look for a card that aligns with your business’s spending habits and offers rewards that are valuable to you. For example, if your business involves frequent travel, a card with travel rewards and perks may be more beneficial than one focused on cashback for office supplies.

Consider the card’s fees and interest rates. While many business credit cards offer attractive rewards programs, they may also come with annual fees or high annual percentage rates. Compare different cards to find one that provides the most value without incurring excessive costs.

Assess additional features. Does the card offer expense tracking tools, spending controls for employees and integration with accounting software? These features can help streamline your financial management processes and enhance your business’s overall efficiency.

What’s the difference between a business credit card and a personal credit card?

While business and personal credit cards function similarly in terms of making purchases and managing balances, several key differences set them apart.

For one, business credit cards are designed specifically for business expenses and often come with features tailored to business needs. These may include higher credit limits, rewards programs focused on business spending categories, and tools for tracking and managing expenses.

Small business credit cards also often require a personal guarantee from the cardholder, meaning the business owner may be held personally responsible for the card’s outstanding debt. That can be true even if the credit card offers employee cards and the debt comes from employee spending. This differs from personal credit cards, where the cardholder is solely responsible for the debt. Business owners that do issue employee credit cards will likely want to place spending limits on each employee’s card.

What’s the difference between a business credit card and a line of credit?

A business credit card and a business line of credit both provide access to funds for business expenses, but they differ in several key ways.

A business credit card is a revolving line of credit that allows you to make purchases and pay them back over time, similar to a personal credit card. Business credit cards often come with rewards programs, higher credit limits, and features tailored to business needs.

A line of credit is similarly a flexible financing option that allows you to borrow money as needed, up to a predetermined limit. But rather than using the credit line to pay for purchases, with a line of credit you withdraw funds from your limit into your business checking account. From there, the funds can be used as cash. Or you can debit the funds from that account to pay for purchases with your debit card.

The application process and eligibility requirements for a business credit card and a line of credit can also differ. Business credit cards often require a personal guarantee and a credit check, whereas a line of credit may involve a more detailed review of your business’s financials and creditworthiness.

The Bottom Line

Understanding the ins and outs of business credit cards is crucial for small business owners and entrepreneurs looking to optimize their financial management. By weighing the pros and cons and comparing them to other financing options, you can determine the best business credit card for your needs.

With the right card in hand, you’ll be better equipped to manage expenses, earn rewards, establish your business credit and support your business’s growth. If you’re ready to explore other types of business funding that may be available to you, consider reaching out to financial professionals.