Editorial Policy

Business credit cards: Don't make these mistakes

Rachel Hartman

May 8, 2014

There's a good reason why three-fifths of small-business owners use business credit cards.

According to a September 2012 Federal Reserve report, 58.8 percent of small businesses use business credit cards. Why?

“A business credit card is super flexible,” notes Levi King, founder and CEO of credit provider Creditera. Unlike a loan that's valid for one specific area, such as equipment, a credit card allows your business to purchase exactly what it needs as it grows and changes.

[Check out our business credit card G+ Hangout on Air with host Erica Sandberg and guest “the Credit Union Guy,” Greg Meyer.]

While a business card can be a solid solution, a few mishaps will quickly change your company's financial picture. Experts say there are five key mistakes you'll want to steer clear of when it comes to business credit cards.

1. Not taking it personally

Your personal credit will likely be checked during the approval process for a business credit card. Furthermore, “Your personal credit history will affect the interest rates you receive for your business card,” notes financial attorney and debt specialist Leslie Tayne, founder of New York-based Tayne Law Group P.C..

Before filling out an application, know where your personal credit stands. Get a free report through AnnualCreditReport.com, and check for errors.

If your score is not high enough to get approved for a business credit card, improve it by making all payments on time and paying off outstanding debt.

2. Losing track of the initial bonus

If you take out a card with an initial 0 percent APR and put a hefty balance on it, you could face steep charges when the regular interest rate kicks in if you still owe a large amount.

To keep tabs on the bonus period, map out payments beforehand. Say you have a card that offers 0 percent APR for 12 months, and you make a purchase for $3,000. Mark the due date for the bill and pay $250 each month, suggests David Bakke, financial expert at MoneyCrashers.com. That way, the balance will be zero when the promotional period ends.

“If you fear you won't be able to pay off the balance before the promotional period ends, be sure to choose a card with an interest rate [after the promotion ends] you can live with,” adds Bakke.

3. Slipping on payments

When you miss payments, you could face late fees, interest rate increases and a lower line of available credit.

If you find it's becoming increasingly difficult to pay bills on the credit card, it may be time to evaluate your business model.

If all of your company's bills are due at the same time each month, look into changing when some of those payments are made, Tayne says. Then, look over your expenses for the past few months. Are you buying business items you don't necessarily need, such as office supplies, furniture or meals at expensive restaurants?

Looking ahead, “budget and carefully allot only essential business items when using a business credit card,” says Tayne. If possible, build a fund with six months of business expenses. That way, if cash doesn't flow in one month, you can take from the fund and use it to pay off the card.

“It's like having a personal line of credit with yourself,” explains Tayne.

4. Overlooking additional features

In addition to getting a line of credit, make the most of the card's other perks.

Select the appropriate rewards program, suggests Jim Salmon, vice president of business services at Navy Federal Credit Union. “If you're not going to travel, get a cash-back feature.”

Also pay attention to lesser-known features. If you purchase a laptop with the card and it crashes right away, you might have insurance on the card for it. Also, if you order items from a vendor with your card that aren't delivered, you can dispute the payment through the credit card company, explains Salmon. This way you won't have to pay for goods you never received.

5. Not opening a card early on

“Business owners should establish their credit card account ASAP to begin building the business's credit,” explains Salmon. This could help open the door for larger lines of credit and other business loans.

Furthermore, you could avoid personal guarantees for a lot of business-to-business relationships, notes King. Say you lease an office space. The landlord could look at your business credit, rather than have you personally guarantee the lease.

“A business credit card is definitely a tool small-business owners have available to them,” says Salmon. As you use the card, you may find it not only helps your business get started, but also propels it for years to come.