How to Get a Business Credit Card
It wasn’t that long ago that making purchases with a credit card was a big deal. But today, cardholders can use their credit cards many times each day, whether they’re swiping it at a terminal, buying items online or automatically paying recurring bills.
Plastic has also become a preferred means of payment for many small businesses. They can use credit cards for almost everything, from funding startup costs to covering daily expenses.
In its 2017 year-end economic report, the National Small Business Association, which has more than 65,000 members nationwide, reported 31% of small businesses used a credit card to meet capital needs. And in the final six months of 2017, 18% of users saw their credit card limit raised. In September 2017, the U.S. Small Business Administration’s Office of Advocacy reported that 13% of small businesses used personal credit cards and 7% used a business credit card for startup capital.
Today’s business credit cards are powerful. Almost everyone accepts them, and it’s easy to apply for one. But It’s important to look for a card that best meets the needs of your business and is suited to your personal and business credit history. It’s also crucial you manage that card responsibly so that you can use it to maintain or improve your credit.
Why you might want a business credit card
As the owner of two businesses, Antara Dutta knows the usefulness of a business credit card. And with a background in finance — seven years as a first vice president at JPMorgan Chase and five years at PricewaterhouseCoopers — she understands credit cards from the issuer’s point of view.
She shares many of those experiences as a volunteer mentor (and former Delaware chapter president) for SCORE, a nonprofit partner of the SBA that provides free and confidential advice to entrepreneurs and small-businesses owners.
“Any business just starting out should get a checking account and a credit card,” Dutta said.
All businesses can benefit from the versatility that credit cards provide. Business owners can use them for a range of reasons, including paying for surprise expenses like presentation materials or a lunch to close a hot deal. Plus, a credit card can also serve as a financial bridge when you need quick access to working capital.
Dutta said many of the services that today’s small businesses rely on are cloud-based, and the only way to pay for them is by entering a credit card number on a website. Although many service providers also accept debit cards, which she describes as a plastic version of cash, most business credit cards have better built-in safeguards, such as fraud protection and warranties for certain purchases. For example, when you use certain credit cards to rent cars, insurance is included at no charge.
Credit cards can reduce the amount of financial paperwork your business has to prepare. They come with detailed statements that itemize purchases, which you can import into accounting software and use to document expenses at tax time. Businesses that use credit cards to pay short-term bills — rent, utilities, office supplies, etc. — cut down on the number of checks they issue, which can also reduce expenses. And if you arm your employees with credit cards, you can ditch some of your reimbursement processes — and your employees won’t have to worry about fronting those costs with their own money.
To cash in on these and other business credit card benefits, you first need to secure one. That process begins by determining where your credit stands.
Know where your personal and business credit stands
It takes more than owning a company to apply for a business credit card. Unless you’ve already established a business credit profile, your personal credit reports are almost always part of the application review.
You are entitled to a free copy of your personal credit report from each of the three major credit reporting bureaus — Equifax, Experian and TransUnion — every 12 months. Each reporting bureau calculates your credit score, which predicts how likely you are to repay a debt. When you receive your reports, review all the information they contain — and work to correct any inaccuracies you find.
Business owners who have established business credit must go through a similar review process for credit card approval, but the scores take different forms. FICO’s Small Business Scoring Service, for example, tops out at 300, with any score above 160 considered good. Dun & Bradstreet’s Paydex Score goes from 0 to 100, and companies that score 80 or higher indicate better on-time payment performance. Experian’s CreditScore report shares the same range as the Paydex Score but incorporates more information.
Equifax offers three reports for businesses:
- Payment Index. This logs your number of on-time payments on a scale of 0 to 100.
- Business Credit Risk Score. This predicts the chance of your business becoming severely delinquent in payments, using a scale of 101 to 992.
- Business Failure Risk Score. Plotted on a scale that goes from 1,000 to 1,880, this predicts if a business will close within the coming year.
Keep in mind that higher Equifax scores generally indicate less risk. Although you’ll find several sources for obtaining your business credit score, expect to pay for the information.
Establish business credit if you haven’t already
If your business is new or you’ve struggled with credit in the past, you might need to develop a solid credit history before you will qualify for a business credit card. The first step is to get a free Employer Identification Number from the IRS. EINs work for businesses just like Social Security numbers work for individual taxpayers. An EIN is unique to each business, and it helps the IRS and creditors identify you. You provide your business’ EIN when applying for credit. But before you do, make sure all your paperwork, including records, filings and licenses, are accurate and current.
Suppliers are a good source for new businesses to get their first credit. Many suppliers allow customers to take delivery of goods now and pay for them later. Business owners can get office supplies, computers and marketing materials this way and get extended payment options as far out as 60 days. By doing this to obtain items you regularly use, you can quickly build your business’ credit score, as long as you pay your bills on time. As an added bonus, the arranged payment delay might better match your cash flow.
Whether you’re trying to get a personal or business credit card, there are things you can do to improve a credit score. Better numbers can mean credit cards with higher spending limits and better terms. Here are five tips for improving your credit score:
- Watch your balances. Don’t keep charging purchases until your credit card is maxed out. Ideally, its balance should never exceed 30% of its limit and should never be more than you can comfortably pay back in one billing cycle. Creditors are leery of businesses with excessive debt.
- Keep debt in check. Your credit score will increase as your debt decreases. But that doesn’t mean you should close credit cards that have no balances. Having fewer credit cards — or only ones you recently opened — can negatively impact your score. Keep business debt at a level that’s reasonable for your industry.
- Ensure transactions are reported. Businesses aren’t required to report transactions to credit reporting bureaus. Choose suppliers that do report so you’re always building and strengthening your credit history.
- Diversify your borrowing. Once you’ve established a credit history, you’ll want to make it stronger. One way to do that is by using different types of credit.
- Monitor your credit reports. Request your credit reports periodically to ensure they are accurate. A business banker can help you identify strategies for keeping your credit in good shape.
Decide what type of business credit card you need
Focusing on the business credit cards that best meet your business’ needs will narrow the field. First, compare APRs, which indicate the annualized interest you paid on the purchases you make with the credit card. Next, look at the cards’ perks — for example, if you or your employees travel often, select one that rewards lodging, airfare and fuel purchases. Here are five types of business credit cards to consider:
- Secured. A secured credit card is for businesses that have nonexistent or shaky credit. You make a deposit in an account, typically up to $1,000. As Dutta noted, that deposit is considered collateral and it matches your card’s credit limit. If you make every payment on time and in full, your credit score will improve, opening the door to other credit cards.
- Travel rewards. Credit cards that offer travel rewards are perfect for businesses with employees who travel often. They offer immediate discounts on hotel bookings, air travel and rental cars, or they might award points for those types of purchases. According to Dutta, one perk might be free checked baggage on trips you charge to the card. Make sure you choose a card that rewards purchases you make most frequently.
- Retail-branded. These credit cards offer perks for shopping at the issuing store. For instance, if you or your employees drive often, consider a gas station credit card, as many give an automatic discount on fuel. But be sure those gas stations are located where you travel or the card won’t benefit you much. Contractors, for example, might want a credit card issued by a home-improvement store such as Lowe’s or Home Depot, said Dutta. Even Costco has a branded card, which could provide huge benefits for businesses that buy supplies in bulk.
- Cash back. These are perfect for businesses that use credit cards often. Be sure to read the fine print so that you understand how the cashback program works — and if there are any limits on how much you can earn.
- Low APR. Seek out these cards if cash flow prevents you from paying off your entire credit card balance every month.
Before you sign on the dotted line for any card, read each line in the credit card agreement, regardless of how small the print is. That’s where you’ll usually find the list of the card’s fees, which might include an annual fee you’ll have to pay just for having the card.
Confirm when you’ll be expected to make payments on the card and how your payments will be calculated. Most credit cards compile charges made during a 30-day window for each payment. But there are some that add more days between bills. Some issuers will provide multiple cards, allowing businesses to grant charging privileges to more than one employee. Ask about that option if it’s something your business needs.
The application process
Once you’re comfortable with your credit report and you’ve chosen the credit card you think is best suited to your business needs, it’s time to complete an application. You’ll find that most are available online and request pretty much the same information: business owner’s name, contact information, gross sales and EIN. Also, nearly all business credit card applications will require an owner’s personal information, including name, contact information, phone number, Social Security number and annual income.
Local banks are often more willing than larger ones to issue new businesses credit cards, Dutta noted. “It’s not that hard to get a business credit card,” she said. “It’s harder to get a bigger limit.” But even a small credit limit — $500 to $1,000 — can help you meet your business’ needs, and if you make payments responsibly, it can raise your credit score.
Keep in mind that applying for multiple cards at one time can have a short-term, negative effect on your credit scores. Just like your personal credit, your business credit can take a small hit from each application for new credit. That’s one of the reasons it’s important to have a sense if you’ll qualify for a card before you apply.
Using business credit responsibly
Chances are the longer you have a business credit card, the more uses you’ll find for it. But no matter how many ways or how often you use it, Dutta encourages all cardholders to make a full payment, on time, in each billing cycle: “You shouldn’t put anything on any credit card unless you know how you’re going to pay it off.” Late payments are the fastest way to lower your credit score. And that doesn’t only apply to credit cards — even missing the due date for your utility bill can negatively impact your credit score, Dutta said.
Also, don’t view personal and business credit cards the same way. First, they don’t share the same consumer protections. Agreements for some business credit cards allow for rapidly rising interest rates or APRs, plus higher fees — both of which are prohibited on personal credit cards. Search for business credit cards that offer protections similar to personal cards.
Another thing Dutta warns against is putting business charges on a personal credit card. “You have no idea how many SCORE clients have racked up personal credit cards while launching a business,” she said.
Mixing personal and business charges muddies your financial situation and could be detrimental to your finances if your business fails and you’re strapped with all that personal debt. Separate credit card accounts also create two accurate and detailed paper trails, which will at the least ease some tax-time headaches.
Be aware that what happens with a personal credit card might affect your business credit card — lenders could report either card to credit bureaus. And when it comes to giving your employees credit cards, keep in mind that there are associated risks. SCORE recommends these preventive measures to make sure employees don’t abuse the privilege:
- Limit spending. Keep the credit limit low and restrict the card’s use to approved merchant category codes. Some cards allow you to restrict card use to certain merchants.
- Write a policy. Outline acceptable credit card uses in a written policy, which every employee who gets a card should review and acknowledge. The outlines should detail what employees can and can’t charge on cards.
- Review statements and require receipts. Review statements at least monthly, either online, where charges and payments are posted almost immediately, or on paper. Require employees to provide receipts, which you can reconcile with monthly statements. Address any questions regarding charges immediately.
The bottom line
Credit cards make doing business easier. They enable you to make quick purchases and keep employees funded while they are in the field. Make sure you choose one with the best terms and rewards for your business, and always use them responsibly. Setting up internal controls to ensure you make wise charges and paying off the balance every month — on time — can help you build your business credit.
This article contains links to CompareCards, a subsidiary of LendingTree.