Business Credit Cards: Know the pros and cons

man sitting at a desk on the phone holding up a credit card with paper work at desk

Advantages of business credit cards Here’s a quick look at why business cards make sense. • Easy qualification: The process of applying for a business card is generally easier to navigate than the process when you apply for more complex financing; some cards may come with more lenient approval requirements and fewer hoops to jump through—especially if the card is issued by the financial institution where you already have a banking relationship. And business cards typically don’t require collateral—though they may require a co-signer initially until the business can establish its own track record. • Convenience: Cards are great for smoothing out your cash flow, especially for normal operations. You can use a business card to make purchases or access cash 24/7. It’s also easier to make purchases online with a credit card than with funding from a more traditional (i.e. less flexible) funding source. Most cards also let you issue plastic to trusted employees, each with an assigned portion of your company’s overall spending limit. • Recordkeeping: The monthly, quarterly and annual spending reports you get with a business card account can help you monitor your (and your employees’) spending, track expenses and categorize purchases for tax purposes. • Rewards and incentives: Because the business card market is highly competitive, most issuers offer built-in systems that reward you with airline miles, cash back or other perks. If you’re the business owner and you have cards issued to authorized key employees, you may earn rewards on the employees’ spending as well as your own. • Building or rebuilding credit: As with personal cards, business cards are an easy way to amass a favorable credit history. Just keep your spending well within the account limits and make your payments on time and watch your FICO score increase. This feature can help your company establish credit for the first time or re-establish credit after taking a hit. Disadvantages to consider • Cost: As a form of unsecured credit, business cards are not cheap. Expect to pay annual or other periodic fees as well as a higher interest rate than you might for a secured loan or credit line. This is mitigated if you pay the balance in full each month. Be aware, too, that interest rates for purchases may differ from rates for cash advances. It’s best to balance the higher costs against the real value of the rewards to see whether it makes sense for your company. • Impact on FICO score: Credit rating agencies look at more than your payment history. They also examine your credit utilization: the proximity of your balance to your credit limit (i.e. the extent to which you’re maxed out). For this reason, it’s not a good idea to depend on a business card for, say, long-term financing on expensive capital equipment. Credit scores also consider how many card accounts you have. If you depend on several business card accounts, each from a different issuer, you might have a harder time securing credit for any big-ticket items you need in the future. • Security: Credit cards are notoriously susceptible to fraudulent use and identity theft, even when you employ best practices. That concern grows exponentially when your company has multiple authorized users. Though issuers have elaborate systems to protect against misuse, detect fraud and limit cardholder liability, the fact remains: it’s a major short-term inconvenience when the card’s security is compromised. Bottom line Use a business credit card for routine operational expenses and smoothing out cash flow after you’ve established your business. But don’t use a business card to obtain the capital needed to expand, purchase or start a new business. For those purposes, consider the DreamSpark plan from Pango Financial instead. It’s a great way to unlock capital by leveraging retirement savings—and you could realize major tax advantages at the same time. To learn more about our innovative DreamSpark plan, call 1-855-WHY-PANGO (1-855-949-7264). Our advisors will walk you through the process, explain the details and help you get started. Sources:]]>