Understanding Business Credit Cards

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Business credit cards are a popular and flexible way for many small business owners to access business credit. A business credit card is basically a revolving credit line a business owner can use, repay, and use again—in some ways similar to a business line of credit. Both a line of credit and a business credit card can be used to pay for many business expenses. A business credit card may be a convenient option for purchasing inventory and supplies, paying bills, or covering travel expenses. According to the SBA, roughly 65 percent of small business owners use credit cards on a regular basis.

Using a business credit card to pay for business expenses is preferable to using a personal credit card for business purposes for a couple of important reasons:

  1. Using a personal credit card to cover business expenses doesn’t help build business credit
  2. The higher credit card balances often associated with business expenses can potentially hurt your personal credit score

Unlike some financing options, credit cards are available to business owners in almost any stage of their business or depth of their business credit profile. Because approval is often largely based upon the business owner’s personal credit history, a business credit card may be a good option for startup and early-stage businesses that haven’t been in business long enough to establish a strong business credit profile, yet occasionally need credit to pay for business expenses.

Terms and Interest Rates Can Vary Depending Upon the Card Issuer

Interest rates and terms will vary by card provider and how they evaluate your credit, so make sure you understand the interest rate you’ll be required to pay on any unpaid balance and any special terms. Additionally, business credit cards don’t work the same way your personal credit cards do. For example, business credit card companies aren’t required to bill the same time every month—making it important to make sure you examine every credit card bill to ensure you understand when that bill is due.

This is important because a late payment, even if it’s only a few hours late, can impact whether or not you keep your introductory rate. A single late payment may even add additional fees to your credit card bill and dramatically increase your interest rate. A late payment, or spending over your limit, could make your business credit card very expensive.

Make certain you understand all of the terms associated with your business credit card.

Benefits Associated with Using a Business Credit Card

There are a number of benefits to using a business credit card that include:

  1. Your credit usage and good credit practices will help you build a strong business credit profile
  2. When compared to a traditional small business loan or line of credit, it’s sometimes easier for a business owner to qualify for a business credit card
  3. Using a business credit card can make it easier to account for business expenses at tax time
  4. The expanded reporting capabilities associated with most business credit cards make it much easier to track and categorize business expenditures
  5. A business credit card can help manage short-term cash flow needs
  6. Like a personal credit card, many business credit cards offer reward programs to users
  7. It’s easier to obtain additional credit cards for employee use if needed on the same account—making it easier to track employee expenses

When Does a Business Credit Card Make Sense?

If you find yourself using a personal credit card to pay for business expenses, it might be a signal that applying for a business credit card is a good idea. You might also consider a business credit card if you’re incorporated, have employees that occasionally need a business card, or otherwise see the need to improve how you track business expenses that would be paid by credit card.

Remember that using a credit card is basically the same as using a revolving credit line. You can pay the balance in full every month or pay over time. If you choose to pay over time, it will of course, include monthly interest and any associated fees.

Qualifying for a Business Credit Card

It’s likely your personal credit history, in addition to your business credit profile, will be part of how the credit card provider evaluates your credit. Your spending limit will be determined by your credit profile and likely your interest rate and terms.

Qualifying for a business credit card may be easier than a traditional loan and could make it possible for a business owner who has not yet established a strong business credit profile or don’t have sufficient revenue to qualify for a small business loan (provided you have a strong personal credit history). As a result, if you don’t have a good personal credit history, qualifying for a business credit card could be more challenging.

Restrictions that May Apply to a Business Credit Card

A business credit card may be used for a variety of purchases, but there are some restrictions. A business credit card typically should not or cannot be used for:

  • Making payroll
  • Consolidating debt
  • Property lease payments
  • Paying invoices from some vendors
Interested in an Alternative to a Business Credit Card: Apply Now

Frequently Asked Questions

What is the difference between a business line of credit and a business credit card?

A line of credit is a revolving loan that provides a fixed amount of capital that can be accessed as needed. All or part of the credit line can be accessed at any give time, repaid, and used again. Interest is only paid on the amount of credit used. Although a business credit card is similar to a line of credit, there are some purchases that can’t be made with a credit card since actual capital is never deposited into your business account.

What is the term of a line of credit compared to a business credit card?

Unlike a credit card, many lines of credit come with an associated term. At OnDeck the average term on a line of credit is 12 months—which is simple and straightforward for borrowers with good credit practices. Many lenders require the balance to be paid down during the term of the credit line. OnDeck requires a pay-down within six months of a draw.

Does a business credit card report my payment history to the credit bureaus?

Like an OnDeck business line of credit, most credit card providers report your payment history to the appropriate credit bureaus, which is why using a business credit card can be a good way to build your business credit profile—provided you make your payments on time.

How is an OnDeck business line of credit repaid?

Once you draw from your line of credit, a weekly payment is debited from your checking account via an ACH withdrawal until the draw is completely paid down within 6 months. Your principle balance is credited as soon as the payment clears (usually within 24 hours). If you were to pay back the entire balance, the full amount of your credit line would be available to withdraw from again.

This content is for educational and informational purposes only, and is not intended as financial, investment or legal advice.