Time to Startup!

The BizFilings blog covering business tips and trends.

Taking the Plunge into Plastic: Choosing a Business Credit Card

Published on Jun 23, 2012


Read 'Taking the Plunge into Plastic: Choosing a Business Credit Card' at 'Time to Start Up,' the small business blog by BizFilings.
Question: What do Google, the Guitar Hero video game series and the movie "Clerks" have in common? Answer: All got off the ground thanks to credit card financing. When it comes to funding a startup, credit cards can be an important part of the mix, and sometimes a main source of money, if you can't borrow significant capital from friends and family or banks. There are risks in using business credit cards to fund a venture, but as the examples above demonstrate, the potential rewards can more than compensate. To keep your risk level as low as possible while maximizing your odds of success, it's important to choose your business credit cards wisely. To that end, it's smart to consider the following three questions. What's the difference between a business credit card and a personal credit card? In many ways, business and personal credit cards are similar, especially if your company is just getting started. The bank or organization issuing the card will likely require you to personally guarantee the line of credit, which means if you can't pay the balance, your own credit rating is in jeopardy. In a column for Entrepreneur magazine, Asheesh Advani, the author of "Investors in Your Backyard," wrote that this does blur the distinction between a business card and a personal card, but it makes sense from the bank's perspective, since most U.S. small businesses are sole proprietorships; however, even after your business is incorporated, you and other significant shareholders may still have to personally guarantee a business line of credit. That said, there are differences between business and personal cards. Business cards might provide statements that categorize purchases, which streamlines bookkeeping. Business credit cards may also offer protection programs that kick in if certain events take place, such as identity theft, equipment/systems failures, loss of a business location, major capital investment, or hospitalization of a key business team member. These programs help you maintain a good credit score in the face of adversity. There are also tax benefits to having a business credit card: You can typically deduct interest, unlike with personal cards. How will I use the card? Knowing how you will use the card will help you determine what features to look for. If you need a card to make payments in the short-term and plan to pay off the balance in full each month, you may be better off with a charge card, which requires payment on the total balance for each period of use. Because of this, there is no interest accrued, and you still enjoy many of the benefits of credit cards, such as fraud protection and rewards programs, as well as not needing to carry large amounts of cash. However, if you're using a credit card to finance a startup in its early stages, chances are good you'll be carrying a balance month-to-month, which means a credit card is the way to go. As when choosing a personal credit card, you'll want to find a favorable annual interest rate on a business card, and be aware of any annual fees. There's often a trade-off to be made here: Cards with annual fees may offer lower interest rates, longer grace periods for payment and more generous rewards packages. However, if you're not going to be using the card often, you might opt for a no-fee card that has a higher interest rate and fewer perks. Benefits and consequences? Not all rewards packages are created equal, and not all rewards that are offered will be especially useful to your business. For example, getting airline miles for purchases would be very useful to a business that requires a lot of travel, but would not be such a great perk if travel is not needed to run or expand the company. This is likely obvious, but also consider exclusions. For instance, a card might offer frequent flier miles only on an airline that doesn't operate many flights from your local airport. So in choosing a card, you should think about what rewards make most sense, given the nature of your operations. Common rewards programs include:
  • Travel perks: In addition to frequent flier miles and other airfare rewards, these include discounts on hotels, rental cars, travel insurance.
  • Cash back: Cash rewards on all or certain business purchases -- for example, a 5 percent cash back program would award $5 for a $100 purchase.
  • Merchant-specific rewards: Some companies -- such as GM and Amazon -- offer business credit cards with rewards like free or discounted merchandise.
  • Points: You can earn points for each purchase, with some types of purchases worth more than others, then redeem the points for a wide variety of rewards -- options might include all the above categories and others.
It may be fun to contemplate how you will take advantage of rewards programs, but you should also consider the less exciting possibility that you may face fines and penalties. Although you may not anticipate ever missing a payment or making one late, find out what the consequences would be if this does happen. What would the fee be? Would rewards be taken away? Would your interest rate go up, and by how much? There may be a lot to consider when choosing a business credit card, but the Internet has taken some of the hassle out of the process. You can turn to websites that offer side-by-side comparisons of business cards to quickly assess what your options are. However, before filling out an application for a card from one of these sites, investigate cards that might not have appeared in the online comparison, such as those offered by community banks in your area. By making an educated choice regarding your business card, you can wield your plastic with confidence.