What is a business credit card?
A business credit card is a credit card intended for use by a business rather than for the personal use of an individual. Business credit cards are available to businesses of all sizes and can help them build a credit profile to improve future borrowing terms.
Key points to remember
- Business credit cards are designed for use by businesses, as opposed to personal credit cards, which are used by individuals.
- For small business owners in particular, having a business credit card can be a good way to separate their business and personal expenses for accounting and tax purposes.
- Business credit cards often come with special perks, but they lack some of the consumer protections required on personal credit cards.
How a business credit card works
Business credit cards are offered by a wide range of credit institutions. The application process is similar to a standard credit card application. Commercial borrowers can apply with or without employer identification number (EIN), which makes it easier for small businesses to obtain a card.
Generally, business credit cards are easier to apply for than non-revolving business loans because the process is usually automated, with an immediate credit decision.
Business credit cards usually have slightly higher interest rates than traditional loans. The reason is that credit card debt is usually not guaranteed, which means higher risk for lenders. (Some lenders also offer secured credit cards this can be useful for companies with little or no credit history.)
Business owners can apply with an EIN if they have one established, or they can use their personal social security number. Lenders will base their underwriting analysis on all information included in the credit application. Businesses have credit reports and build a credit history the same way individuals do, so any activity using an EIN will be reflected in the business’s credit report.
Benefits of business credit cards
Business credit cards have unique advantages over their consumer counterparts. For instance:
Business credit cards can be a great way to manage and itemize business expenses. In addition to offering the usual conveniences associated with credit cards, business credit cards help small business owners, in particular, separate their business expenses from their personal expenses. This separation can be useful for accounting and tax purposes. The cards also allow employees to easily make purchases and businesses to monitor their employees’ business purchases.
Business credit cards typically come with unique perks designed to attract business customers. These benefits may differ from those offered to individual customers. For example, some business credit cards offer cash back on purchases at stores that businesses are likely to frequent, such as office supply stores. Business credit cards also tend to offer larger sign-up bonuses than individual credit cards, in anticipation of high business spending. Many will also offer 0% interest as an introductory rate for a short time.
Travel benefits are another common perk, as many companies have significant travel expenses. A business credit card can entitle its holder to use an airline’s VIP lounge at airports or to receive discounts on hotel stays during business trips.
Additionally, business credit cards sometimes offer more flexible repayment terms designed to specifically appeal to businesses whose cash flow may be erratic.
Disadvantages of business credit cards
But business credit cards also have serious drawbacks that are worth considering:
Often businesses do not have the minimum requirements for credit scoring or any other analysis of their creditworthiness, so the lender may request a personal guarantee from a business owner or other person. A personal guarantee is a contractual provision that holds the person applying for the card responsible for regular payments and fees.
Many business credit card agreements include a personal guarantee clause regardless of the company’s creditworthiness. It is therefore important that borrowers read and fully understand all the conditions outlined in the agreement. If the lender adopts the personal guarantee provisions for repayment, any default on the card could be flagged on the individual’s credit report and affect their credit rating.
Fewer consumer protections
While Congress has expanded protections on consumer credit cards, including in the Credit Card Accountability, Liability and Disclosure Act of 2009 (CARD Act), he generally exempted business cards from the new rules. As a result, consumer protections that many people take for granted with their regular credit cards, such as a ban on raising interest rates on existing balances, may not apply to their business cards. .
Some card issuers have voluntarily extended some of these protections to their business credit cards, but applicants should not assume this is not specified in the card agreement.
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