Once you’ve made the commitment to be a business owner, you’ll probably want to apply for credit to finance your expenses. There are four things that separate business credit cards from personal credit cards that you should be aware of.
- Consumer Protection Laws Do Not Apply- The Credit Card Act of 2009 was put into law to protect consumers from unexpected increases in interest rates and other fees. However, credit card issuers were not in favor of offering this same courtesy to small business because of the risk associated, as small business owners tend to charge higher amounts on credit cards and creditworthiness is harder to ascertain. Getting large credit lines is a determinant of creditors ability to adjust rates down the road based on how well you pay the debt.
- Your Personal Credit Can be Affected by Business Credit Cards- Approval is normally based on your personal credit file. Most business credit cards require a personal guarantee. In other words, you promise to be liable for the debt. If you miss any payments, it will be reported on your personal credit file.
- Business Credit Cards Offer Higher Credit Limits- In case you think using your personal credit cards will suffice for your business needs, think again. Making costly purchases are better made with business credit cards because the higher the limit and the less you use improves your overall credit standing. For example, say you have a $5,000 credit limit on a personal credit card, and you purchase $3,000 worth of inventory. Your debt to credit ratio is 60%. But if you have a $20,000 business credit limit and you purchase that same $3,000 worth of inventory, your debt to credit ratio is now lowered to 15%.
- Using Your Personal Credit Card for Business Can Cost You- If you use your personal credit card for your business expenses, then you should stop using that same card for personal expenses. You will need to pay the credit card debt with the business profits, because co-mingling of funds may void your personal liability protection.
Business credit cards can prove rewarding for entrepreneurs. These credit cards can help establish business credit, as well as finance your business, and provide you with the higher credit limits you need. It takes being knowable and keeping abreast of the terms, your rights, and your responsibilities.