If you've always dreamed of starting your own business, or you already own a small company, you've probably faced this credit card dilemma: business or personal?
While many experts say the ideal scenario is for an entrepreneur to use a business credit card for purchases they're going to pay off right away or a line of credit from a bank for items they need to pay off over time, many new or very small businesses are turning to personal cards to fill those needs.
Making it personal
A 2012 survey of business owners by the National Federation of Independent Business found that 49 percent of small business owners use personal credit cards for their businesses, an increase of 4 percent over a poll two years earlier. Owners of the businesses with fewer than 10 employees were most likely to use personal cards.
That's what Caroline Fielding, a Tampa, Fla., paralegal, did when she decided in 2011 to start her own business creating iPhone and iPad apps. She considered applying for a business credit card but did not, partly because she thought it would be too difficult as a brand-new business owner to get one.
Instead, she shopped around for a consumer card and finally chose a Chase MasterCard with Blueprint, which offers a set of features for cardholders to pay off certain categories of spending, such as gas or office supplies, each month while paying off larger purchases over time.
“It gives me flexibility, which I really need right now,” says Fielding, who used the card to pay for a developer to create her app, Bus Rage, as well as website design, marketing costs and the fee to incorporate her company, Dryven Inc.
Fielding isn't alone.
“A lot of startups rely on personal cards when they're getting their businesses going,” says Molly Brogan, vice president of public affairs for the National Small Business Association (NSBA).
In fact, fledgling businesses “might not have a choice,” about using a personal card vs. a business card, says Greg Go, owner of online publishing company Killer Aces Media, which runs the personal finance site WiseBread.com.
Some new businesses might not be able to get a business card, he says, but adds that it's worth a try. Each year, however, you should be doing a financial audit of your business.
“At that time, see if you can upgrade to a business card,” Go says.
Business vs. personal: what to consider
What's the difference between using a personal and a business card? Here are five things you should know:
1. In general, business cards have much higher credit limits and lower APRs. Of course, the credit limits and interest rates on both personal and business cards vary widely based on the card, credit history and other factors. But in general, Go says, a personal card might have a four-figure or low five-figure limit, while it's not uncommon for a business card to have a limit of $50,000 or even $100,000.
2. Business cards have different perks and rewards.
“Credit card companies often try to tailor their rewards program for a business card around a small business,” Brogan says. “For example, you can use your credit card points at Office Depot or Costco or some other place where small business owners rely on purchasing goods for their business.”
Business cards also might be more likely to have higher-end perks, such as trip insurance and lost luggage protection, Go says.
3. A business card helps you build a credit history for your business, while just using your own personal card does not.
“A lot of business owners forget about that when they're first starting out,” Go says. “Then maybe they go to [a bank] two or three years down the road to apply for a line of credit, and then they realize the company has not built up a lot of credit.”
4. On the other hand, business cards are not covered under the consumer protections imposed by the Credit CARD Act of 2009 that apply to consumer credit cards. That's a big concern for NSBA, which wants to see that changed, Brogan says. For example, consumers who use personal cards are protected from practices such as retroactive rate hikes.
“If you make one late payment, instead of jacking up the interest rate on purchases going forward, [the business card issuer] could do that on the entire balance,” she says.
However, some banks, such as Bank of America, are extending certain protections to business cards by choice, she says, but they are not legally obligated to do so and could stop at any time.
5. Business owners can't just use a personal card for their business and count on getting those protections, Brogan says. The CARD Act is an extension of the Truth in Lending Act, which excludes personal cards used primarily for business.
“If you have a startup small business and you use your AmEx you've had for 20 years to fund a lot of it, if you start using that card primarily or exclusively on small business purchases, it then becomes a business card,” she says. “That's not that AmEx switches you over to a business plan or anything, but how you use the card establishes how credit card companies can treat you as a cardholder.”
How you use the card matters most
Even more important than the type of credit card you choose to fund your business is how you use it, says William Dennis, senior research fellow with NFIB Research Foundation.
Just like consumers, business owners need to make sure they don't use credit to get in trouble with high-interest debt. NFIB's survey found 32 percent of small business owners carry a balance. The median balance was $1,500, but 17 percent of business owners carried a balance of $10,000 or more on their personal cards. Carrying that kind of card debt suggests a business owner has financial problems and makes the chances of getting other outside credit slim, Dennis says.
“As a transactional device, a credit card makes a lot of sense — it's handy and easy to use,” he says. “But using it for credit purposes is a very different story. It generally means you don't pay it off, and keeping large balances is a very bad idea.”
Another mistake business owners sometimes make, especially when they use a personal card, is mingling their business and household finances.
“Keeping expenses separate is a nice, clean way to do things, both for taxes and just keeping things straight so you know what your business expenses are,” Dennis says. “If you start melding business and personal expenses, you can get yourself in trouble really fast.”