Business Credit Cards: A Primary Tool for Your Business

In a fast-paced world of business, managing your finances correctly is very important to your success. One of the most valuable tools to help you with this is a business credit card. While personal credit cards are commonly used, business credit cards offer a lot of advantages specific for business owners and entrepreneurs. However, similar to other financial tools, there are a mix of advantages and disadvantages to consider. In this article we will explore the reasons why you should consider a business credit card, the main advantages and disadvantages, and the important concept of business credit. Let's start.

What is business credit?

Similar to personal credit, businesses have their own credit. While personal credit is a persons ability to borrow money and pay it back in a timely manner, business credit is basically the same concept but it is the business's ability to borrow and pay back instead. Unlike personal credit, business credit is tied to the business's financial history and not the individual business owner. So as an individual, you have a personal credit history and score while your business has its own business credit history and score. This is an important concept to keep in mind as a business owner because building strong business credit tells lenders, vendors, and any other related party that your business capable of borrowing money and paying it back.

Why Your Business Should Consider a Business Credit Card?

A business credit card can be a great tool when used responsibly, like any credit card. Here are some reasons why:

Building Business Credit: Consistent and responsible use of a business credit card can help you build business credit, similar to personal credit cards. Credit in general helps open doors to future financing opportunities.

Enhanced Cash Flow Management: Business credit cards provide a buffer between purchasing and paying, allowing businesses flexibility in their cash flow. This flexibility allows businesses to prioritize their finances accordingly.

Rewards and Incentives: Many business cards offer rewards such as 0% introductory rates, cash back, travel points, and other benefits. A lot of these benefits are gained when the business spending aligns with the rewards program's requirements. Over time, these rewards can provide great benefits for your business to access. It is important to review a multitude of business credit card products to see what they offer and how they can fit your business situation.

Advantages of a Business Credit Card

There are many advantages and uses for business credit cards, and these advantages outweigh the disadvantages as long as they are used responsibly and paid back accordingly. Let's review some of the advantages below:

Separation of Business and Personal Finances: A business credit card allows you to keep your personal and business expenses separate, making it extremely beneficial for bookkeeping, accounting, and tax reporting. It helps simplify tracking and managing business expenses. Keeping personal and business finances separate will help you avoid headaches in the long term.

Higher Credit Limits: Business credit cards typically offer higher credit limits than personal credit cards. For many businesses, this is very crucial since it allows them to make large purchases for inventory, equipment, services, etc. without using cash reserves.

Expense Management Tools: In this day and age of technology and software, many business credit cards come with expense tracking and management tools, which allow business owners to monitor spending in detail. These tools help streamline accounting and provide a clear picture of where funds are going.

Employee Cards: A key feature in business credit card accounts is the ability to provide employee cards. With employee cards, you can set spending limits and keep track of what is being purchased and who purchased it.

Disadvantages of Business Credit Cards

With everything, you should also consider all the disadvantages before making a decision to obtain a business credit card. Knowing what is all involved helps make better informed decisions. Let's review some of the disadvantages below:

Personal Liability: Many business credit cards require a personal guarantee, meaning that the business owner is personally liable for unpaid debts. This can put the owner's personal finances and assets at risk if the business is unable to meet its obligations.

Potential for High Interest Rates: Business credit cards may come with higher interest rates, especially if the balance is not paid off in full each month. If not managed carefully, this can lead to significant accumulation of debt. It is always a good idea to focus on repayment of credit card debt each month.

Temptation to Overspend: Along with the point above, easy access to credit can sometimes lead to overspending. It is very important to maintain discipline when using a business credit card and to make sure that the business budgets accordingly.

Fees: Some business credit cards have annual fees, especially those offering premium rewards or features. Depending on the size of the business and how the card is used, the fees may outweigh the benefits. It is always a good idea to review the fees within the terms of the business credit card so you know what you are potentially signing up for.

Impact on Business and Personal Credit: While the goal is to build business credit, some business credit cards may report activity to both business and personal credit bureaus. Although many cards only report to business, it is important to keep in mind the different card products. Always read the terms, and it also helps to inquire about reporting. The other impact that business cards have on personal credit is if you don't have business credit and you are applying for a business credit card, the lender may inquire into your personal credit score, potentially affecting it.

Are business cards right for you?

Business credit cards are valuable tools that help businesses manage expenses, build credit, and access short term financing. As mentioned above, a lot of the advantages outweigh the disadvantage as long as the business credit cards are used wisely, responsibly, and are paid back accordingly. As with any other financial tool, always read and understand the terms and fees to see if they fit your business's financial needs.

If you feel like business credit cards are the solution for you, let's chat.