More than two years after the onset of the credit crisis, credit remains tight for small businesses. As a result, business credit cards continue to serve as a back-up for many small business owners, according to a recent survey of 856 small business owners by the National Federation of Independent Business.
In the survey, 58 percent of business owners reported using business credit cards, and 45 percent reported using personal credit cards for business expenses. A full 95 percent of those applying for business credit cards in 2010 were approved on their first attempt, compared to 41 percent of those applying for other types of credit.
In short, business credit cards continue to play an important role in business funding for many small business owners. However, when using credit cards for business funding, it’s important to make sure that the cards work for you and your business and not against you. Here are five best practices for using business credit cards to your advantage.
1. Protect yourself against retroactive interest rate increases.
The Credit CARD Act of 2009 put in place protections against retroactive interest rate hikes on existing balances for personal credit cards. Card issuers can only raise rates retroactively if a cardholder is more than 60 days behind with payments. Unfortunately, like the other provisions in the law, this rule does not apply to business credit cards. This means that, in theory, the APR on a $25,000 credit card balance could go from 11.99 percent to 21.99 percent with little notice.
How to protect yourself: For credit cards that you plan to carry a balance on, there are two ways to avoid retroactive interest rate increases. One option is to use a personal credit card, which falls under the protections of the Credit CARD Act. However, this option is not ideal because any credit card balance for your business would pull down your personal credit score. Alternatively, take out a business credit card withBank of America, which has pledged to apply the rules of the Credit CARD Act to its business credit cards as well. So far, the bank appears to be following through on that promise.
2. Take full advantage of rewards and cash-back bonus programs.
Business credit cards feature some of the most attractive sign-up bonuses and rewards programs in the industry. Some cards, such as the Simply Cash Business Card from American Express, offer 5 percent cash back on certain office-related purchases, while others, such as the Capital One Venture for Business, give the equivalent of 2 percent cash back on all business purchases.
How to benefit: Supercharge rewards earnings on business purchases by taking out additional cards for employees, and set a spending limit on the cards to protect against abuse. Keep a dedicated credit card account for rewards earnings, and pay it off in full each month to avoid paying high interest rate charges. Then use a separate, low interest credit card for carrying balances.
3. Keep an eye on your credit score.
Keep your personal credit score in mind when using business credit cards. In some cases, the activity on a business credit card account may be included in your personal credit report. For example, late payments on a business credit card will end up on your personal credit report and draw your score down. Similarly, high credit card balances on business credit cards could make you look overleveraged and pull your personal credit score down as well.
How to avoid credit score impact: To avoid having business card balances artificially inflate your personal credit utilization ratio, stay with issuers that don’t report business credit card balances to the credit rating agencies. While some business card issuers automatically report business credit card balances to the credit agencies, some do not. For example, according to the Wall Street Journal, American Express and JP Morgan Chase only report business account balances to the commercial credit bureaus, such as D&B and Experian’s Small Business Services. Only in the event that the account becomes delinquent do they report that balance to the personal credit rating agencies as well.
4. Have a back-up in place.
Credit card loans are easier to come by, but terms are more liable to change. At any point in time, card issuers can choose to slash credit limits or increase the minimum monthly payment due. And even if you go with a card issuer that pledges not to hike interest rates retroactively, card issuers can still raise rates on future purchases and charges.
How to access alternative sources of funding: Take steps early on to build your business credit score and increase your chance of qualifying for other types of business financing down the road. For example, develop a relationship with a local bank or credit union; they are more likely to take into account personal relationships when evaluating loan applications. If necessary, explore other financing alternatives, such as account receivable financing.
5. Take advantage of perks and benefits.
Most business credit cards come with bookkeeping and expense reporting features that can help you manage and control business expenses. Expense reporting, for example, will automatically sort purchases by category; options for downloading card activity into accounting software programs like QuickBooks can also simplify bookkeeping tremendously.
How to benefit: Taking out additional authorized user cards for employees can help fast-track expense reporting and keep all key business expenses in one place, enabling you to get a quick overview of where your money goes each month.