You may have no problem using credit cards for your purchases, but have you ever thought about using credit cards to fund your startup or small business? You’ve probably heard about it, and even received offers to apply for a small business credit card. But, is it really a good financial source for your organization?

There are small businesses that turn to credit cards to cover certain business costs and finance their operations. It’s also a convenient way to boost your company’s purchasing power.

business credit card
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What is a Business Credit Card?

Business credit cards provide owners with fast and easy access to a revolving line of credit that allows them to make purchases and withdraw cash.

Similar to consumer credit cards, these cards come with a set credit limit and an interest charge if the owner fails to repay the balance in full every billing cycle. This can come in handy when you need to finance your short-term and unexpected needs in your business.

If your business has been established long enough and built equity, you can obtain a business card with higher spending limits than a consumer credit card. But, if you’re not yet established, the spending limit will depend on the credit and the qualification of whoever will be personally accountable for the debt.

Business owners can apply for this type of credit card through their bank. Of course, you should research and pay attention to the different business card products offered by different banks to find the best one for you. Accomplish the requirements and apply for the card. Owners can decide which employees can hold a business credit card.

When to Use Business Credit Cards?

There are different reasons why entrepreneurs or startup owners resort to credit cards to finance their business. Below are some of the most common reasons:

  • When they need no more than $50,000 to finance your business
  • When they haven’t been in business long enough to qualify for a bank loan
  • When they need a source of fast and flexible financing for your business, especially for short-term needs

Advantages of Using Business Credit Cards

There are many benefits to using a business credit card, such as maximizing your available credit and providing cash flow. Let’s have a look at some of the other advantages of credit cards for your business.

  • It can serve as a financial cushion

Like personal credit cards, which can serve as a backup financial solution for unexpected expenses, you can use your business card when accounts receivables are lagging or when your sales are low. When you’re short on cash, using the card can help fund your business or maintain operations for the time being.

  • Online convenience

Whether it’s for purchasing office supplies or doing business with vendors, contractors, or suppliers, using a credit card makes your online transactions easier and smoother.

This is especially helpful when you need to purchase a product or supply before you run out of it, and you’re unable to purchase physically, especially in times of pandemic. You can easily place our order through the vendor’s website and pay for it immediately.

  • Rewards and perks

Like personal credit cards, business credit cards also provide several incentives redeemable for flights, hotel accommodations, gift certificates, entertainment packages, and more. You can use your card to buy office supplies and get shopping discounts. Some credit cards also offer cashback incentives.

These perks and rewards depend on the credit card, so it pays to carefully select the best type of card possible for your needs. If you don’t do business travel, then it may be better to pick a cashback rewards business card so you can earn points or discounts for the things you need for your business. With credit cards, it’s important to be financially smart with installment buying.

  • Fraud protection on purchases

Cash transactions, business checks, and debit cards don’t have stringent protection against fraud, unlike business credit cards. When you’re just starting, this feature can help protect your credit rating together with your business assets. This can be a lifesaver.

Make sure to look for a credit card with robust services that can stop fraud as it happens, such as unusual activity notifications and other important credit charge alerts. Some banks do not require an additional fee for fraud protection, while others may charge you a small amount.

  • Allow better tracking of business-related expenses

For tax reasons and easy tracking, it’s crucial to have separate accounts for your personal and business expenses. By using a business credit card to purchase supplies, packaging materials, and even lunches for your team, you can conveniently keep tabs on all your business expenditures and employee spending.

No matter how big or small the purchases are, you can see the items on your credit card monthly statements. Some businesses integrate their credit cards with their accounting software tool for better bookkeeping. You can ask your accounting team for more information or details when you decide to get a business credit card.

business credit card
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Disadvantages of Using Business Credit Cards

Businesses must know when using the credit card is the best choice. Before you collect your requirements and submit your application, consider its potential disadvantages, too.

  • Balances can amass fast

Like with a consumer credit card, it’s essential to pay your dues on time and, if possible, in full every month to avoid debt traps. Note that even when you purchase something with zero interest, you’ll be charged an interest fee every succeeding month after the no-interest period ends. The outstanding balances and late fees quickly rack up when you fail to make payments.

Additionally, making big-ticket purchases like equipment or tools can earn you great rewards. It’s best to pay off your balances promptly to maximize the benefits without accumulating debt. Otherwise, you’re bound to face some hefty penalty fees that can be a challenge to repay.

  • There’s a possibility of misusing it

Who will be assigned to use the credit card once you get one? For what purposes will you be using your business card? Check your monthly bills to ensure that all the expenses are accounted for and approved. It’s crucial to limit credit card spending to its only intended use. Moreover, consider protecting your card from potential identity theft, especially if a few of your employees use the same card.

  • Credit limits are typically low

If you’re a small business, the approved credit card limit often starts relatively low. For example, some banks approve credit limits only up to $50,000. This amount may not be enough to kickstart a business; however, it may help fund your other necessities like software and tools needed to run your operations. If you need a higher amount, traditional business loans may be the better option.

  • Personal liability

Usually, small business credit card providers require a personal guarantee along with the documents needed when applying. This ensures that if your business fails to pay off your balances, you will be personally responsible for it—you will have to repay the debt.

Additionally, if your business becomes unsuccessful, that will reflect on your credit card statement. This can negatively impact your own credit score and credit history, as well. While personal liability is not exclusive to business credit cards (it applies to small business loans, too), it’s still a factor to consider.

  • Fluctuating interest rates

Credit card issuers can reset your card’s interest rate based on how you use and handle your account, which is one of the main differences between using a business credit card and getting a loan. With the latter, the interest rate is fixed. Given this, you must understand how interest rates and other penalty fees help you avoid hefty credit card fees and manage your credit more responsibly.

Some Tips for Using Credit Card for Your Business

Now that you’ve decided to get a business credit card, you must do your research and understand the fine print behind the credit card options issued by different card companies. From credit limits to the fees that come with it, you need to educate yourself about these factors to use it effectively.

  • Determine the right card for you. Besides comparing interest rates and fees, make sure to look into the rewards programs of the cards you’re considering. This should help you decide which card would best suit your business’ spending and what you could benefit from it.
  • Understand the fees involved. Before you apply for a credit card, find out what type of fees you’ll have to pay. Is there an annual fee? How much will you get charged for fraud protection (if any)? 
  • Be meticulous about your recordkeeping. To help refine your reimbursement process, make sure to record everything. You can ask the employees in charge of the credit card to take pictures of the receipts from all your business expenditures. If necessary, you can note other information, such as the date and time of the transaction.
  • Pay your monthly dues on time. Much like how you use your personal credit card, it’s best practice to pay your monthly dues in full and on time to avoid accrued balances and fines.

Use Credit Card Wisely

Business credit cards have become a useful financial solution and a flexible credit line for small businesses and startups. Being a responsible credit card owner—in this case, in using business credit cards—ensures that you’re making smart business decisions. At the end of the day, your goal is to grow your business and not put what you’re working hard to build at financial risk.