Business Credit

The Differences Between Business Credit Cards and Personal Credit Cards

A business credit card can help you establish business credit whereas a personal credit card is based on your personal credit. Because the two have different purposes, there are many things to consider when thinking about your business needs and your scores and ratings. 

This article answers:

  1. The Benefits of a Business Credit Card
  2. Are There Differences Between Business Credit Cards vs. Personal Credit Cards?
  3. What Is the Difference Between Business Credit vs. Personal Credit in General?
  4. How to Find the Best Business Credit Card for Your Company
  5. How to Apply for Business Credit
  6. How Are Business Credit Card Limits Set?
  7. Do Business Credit Cards Impact Your Business Credit File?

A business credit card can be a powerful tool for small business owners looking to access capital, earn rewards, and lay a foundation for growth. These cards have become increasingly popular, with many banks and card issuers offering accounts tailored to small businesses. However, not all business credit cards are created equal. Prior to opening an account, business owners need to do their due diligence to try to find a card that aligns with the financial goals and realities of their company.

Benefits of Business Credit Cards

Why are business credit cards popular? Here are some of the potential benefits:

· Access to capital: Business credit cards enable business owners to charge purchases and pay them off over time, along with applicable interest, which can help them manage cash flow. Bank loans or lines of credit aren’t always available to small businesses, so many use their credit cards for purchases.

·  Saving money with rewards: Many card issuers offer rewards in the form of cashback, airline miles, and savings when you spend a certain amount. Where these rewards can be used depends on the program, but they’re often tailored to the needs of small businesses.

Building business credit: A new business may not have enough payment experiences to establish a business credit file. Some card issuers report payment histories to companies like Dun & Bradstreet, allowing small businesses to begin building business credit. We’ll discuss this in detail a bit later.

Are There Differences Between Business Credit Cards vs. Personal Credit Cards?

Personal credit cards are just one of many options to consider when developing or managing your personal credit. Personal credit cards offer different rewards or perks, and some are tied to an affinity you may have to a program, school, or other entity, such as your alma mater or a sports team. Rewards and perks differ based on the financial institution offering the personal credit card and their understanding of their credit card holders’ behavior, wants, and needs.

Business credit cards offer many of the advantages listed above and frequently their perks will be more business-related. Having a business credit card can help some business owners keep their personal expenses separate from their business expenses, which can be helpful for them when doing their accounting or taxes. Make sure that you consult your accountant or lawyer if you have any questions about your accounting or taxes for your business. Some disadvantages to business credit cards can include a lack of purchase protection, which can make returning purchased goods or correcting billing errors more difficult – even when reversing fraudulent charges.

While a business credit card may help with an immediate need for financing, you will generally pay higher interest rates when financing with a business credit card. This could mean that you end up paying more in the long run for the convenience of charging your purchase than you would if making your purchase with another business financing option. It’s rare to find a 0% annual percentage rate unless completing a balance transfer, and the promotion periods for those are generally very short when it comes to business credit cards.

When applying for a business credit card, your personal credit score will get a small hit, because banks generally still use your personal credit report to establish creditworthiness. After the initial inquiry, the business credit line belongs to your business.

What Is the Difference Between Business Credit and Personal Credit in General?

Similar to your personal credit, your business may have scores and ratings that reflect your company’s reliability. Other companies can pull your business’s credit file, if it has one, to evaluate if they want to work with you, award you a loan, or extend trade credit. Because of this, separating your business credit and personal credit can be beneficial for many reasons because they serve different purposes. Just as personal credit is used for personal needs, business credit can be used for business-related needs. Much like having a good personal credit score can help someone qualify for greater financial responsibility in their personal life, such as a mortgage or an auto loan, business credit scores and ratings may help do the same thing for a company.

One thing to note is that when a company is just starting out, the owner may still be asked to leverage his or her personal credit until the business credit is more established. You can learn more about the differences between personal and business credit here.

How to Find the Best Business Credit Card for Your Company

Deciding which business credit card to apply for isn’t as simple as going with a name you trust. These cards can help your business free up cash flow and save money with perks, but the wrong card might leave you disappointed on both counts. What are some of the most important factors to consider when searching for a business credit card?

APR - The annual percentage rate, or APR, determines how much interest you’ll pay on purchases. Many business credit cards carry higher interest rates than their consumer counterparts. Because business credit cards are often unsecured (meaning no asset is attached to them in case of default) and used to make costly purchases, issuers may charge more to protect against losses. A business credit card’s APR is one of the most important considerations when shopping around, as it can literally cost you money down the road.

Benefits - Many small business owners look at the rewards offered by various business credit cards when deciding. Savings can really add up and may be delivered in the form of cashback, airline miles, or discounts at participating retailers. It’s a good idea to compare rewards programs before applying for a card, to determine whether the benefits are generous enough and apply to goods or services your business uses.

Peer Reviews - You may also want to seek out reviews from other business owners, whether online or in person, to learn about their experiences with a specific card. A little bit of research could prevent you from making a mistake.

How to Apply for a Business Credit Card

Ideally, small business owners would have strong personal and business credit. Paying bills on time (or early, when you can) and keeping lines of communication open with your lenders and vendors can go a long way toward helping with both.

When small businesses first start up, it is common that they are started without business credit. In these cases, the process of applying for a business credit card is similar to applying for a personal credit card. However, if you are just establishing your business credit, there are a few things you will want to consider doing.

If you do not have business credit, you may want to establish a trade account with a vendor who reports trade experiences to reporting bureaus such as Dun & Bradstreet. For example, working with vendors who allow you to pay by invoice and then report your payment performance is one way to establish your creditworthiness. Your positive payment record will help serve as a benchmark for a business credit card issuer. Another way to establish your business as being creditworthy is to set up a secured business credit card. A secured business credit card is one that is “secured” or guaranteed with a savings account. For example, if you place $500 in a savings account, the bank may approve you for a $500 credit line. This way, if you default on your payments, they will access your savings account to pay the balance, so your credit is “secured” by a linked savings account.

As you establish business credit, research the options available for business credit cards and determine how you will use the card. Consider the type of business you operate and the type of business needs and expenses you will incur. For example, if you anticipate traveling to meet clients or vendors, then perhaps a business card with travel rewards will best suit your needs. Or, if you plan to purchase office supplies on a regular basis, then perhaps a business credit card with cashback rewards will be a better fit.

Compare the credit cards you are considering and research as much as possible before applying. Each time you apply, there will be hard inquiries on your credit report, which you will want to minimize, if possible.

Check your personal credit score so that you have a sense of how you might appear to financial institutions. Are you a credit risk? Or do you have top-tier credit?

Once you have completed research, compared cards, and checked your personal credit, you can begin the process of applying for a business credit card.

Most business credit cards will offer an online application. You will most likely be asked to provide:

  • Legal business name, address, and contact phone
  • Tax ID
  • Type of business and annual income
  • Number of years in business and monthly business expenses
  • Personal income, Social Security number, and date of birth

Starting out, it is common for banks to want to establish your creditworthiness based on your personal credit scores. Once approved for your business credit card, use it responsibly and, in parallel, build a strong business credit profile to help grow your business credit and your business.


Personal Guarantees for Business Credit Cards

Many small business owners apply for business credit cards because other financing solutions aren’t available to them. One reason for this may be that they haven’t built enough business credit to satisfy some traditional lenders. This isn’t usually an issue for business credit card issuers. Instead, they’ll often look to the applicant’s personal credit file for guidance.

The connection between the business credit card and applicant goes deeper than this. In almost every case, the applicant needs to agree to a personal guarantee, putting them on the hook for any unpaid debts on the card.

This personal guarantee is separate from the business structure of a company. Even if a company exists as a separate entity, the personal guarantee associated with a business credit card means the issuer can come after the applicant to be made whole. That, in turn, can affect their personal credit file. This liability is just one reason it’s important to stay within your means when using a business credit card.

How Are Business Credit Card Limits Set?

Business credit cards often have higher credit limits than their consumer counterparts. Lenders know that small businesses have substantial costs, including equipment, materials, and inventory. As such, a qualified applicant can usually access a fairly high credit limit right off the bat.

The credit limit on your business credit card is determined by many factors. As previously discussed, the lender will probably look at the applicant’s personal credit scores to see how they’ve handled debts in the past. They’ll also ask for information about your business’s costs and earnings, along with comparable details for the industry at large.

What can you do if the credit limit is too low for your needs? First, consider whether you can handle the increased debt load that could accompany a higher credit limit. There may be a reason the lender set it below your expectations; they might be wrong, but they might be concerned that you could be setting yourself up for more debt than your business can handle.

If you’re confident that a higher credit limit is prudent, it may help to utilize the card for a few months to demonstrate financial responsibility to the card issuer. Once you have a short history of on-time payments, you can contact them and ask for a higher credit limit. They’re under no obligation to agree, but it’s one avenue to pursue.

Do Business Credit Cards Impact Your Business Credit Score?

A business credit card can help you establish business credit, but there are several caveats. Credit card agencies may not report to all the major business credit bureaus, and which companies report to which bureaus is confidential. To complicate matters, some business credit card issuers that submit information may only pass along negative experiences like late payments. Consider asking for details on what, if anything, is reported to business credit bureaus. Assuming your card issuer does pass along payment experiences, using a business credit card may impact your business credit scores and ratings.

Getting a business credit card can be a smart move. Spending time researching cards and considering your company’s financial needs are important steps to finding the right one. Don’t be taken in by marketing – this is about doing what’s best to help your small business grow.

The opinions and information provided by Dun & Bradstreet in articles and blog posts (collectively the “Information”) are provided “as-is.” Nothing stated or implied in the Information should be construed to be legal, tax, or professional advice. Dun & Bradstreet makes no representations or warranties, express or implied, with respect to such Information and the results of the use or reliance on such information. Please contact an attorney or finance professional if you are in need of legal or financial advice.

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