Business Financing: Should You Take Out A Loan, A Credit Card, Or A Line Of Credit?

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When it comes to business financing, merchants have many options to choose from. Three of the most popular sources of financing are small business loans, business credit cards, and lines of credit. All are useful options, but each carries its own separate advantages and disadvantages.

Which is best for your business financing needs: a business loan, line of credit, or business credit card. Or should you get some kind of combination of the three? Keep reading to learn everything you need to know.

Table of Contents

Loan, Credit Line, & Credit Card Uses

Your ultimate intention for borrowed funds is very important when considering the right type of financial product for your business. While there is a lot of overlap, some financial products are better suited to different situations and uses than others.

Here is a table illustrating what each loan or credit card is typically used for:

Loan & Card Uses
Small Business Loan Line Of Credit Business Credit Card
• Business growth projects
• Asset purchasing
• Bridge loans
• Working capital
• Cash flow needs
• Disaster assistance
• Debt consolidation and refinancing
• Business growth projects
• Bridge loans
• Working capital
• Cash flow needs
• Disaster assistance
• Emergency funds
• Everyday purchasing
• Saving money by earning points or cash back
• Working capital
• Cash flow needs
• Emergency funds

Small business loans are a very popular financing option, and it’s easy to see why — they can be used for many business purposes, such as asset purchasing, business growth projects, and debt consolidation or refinancing. However, there are times when lines of credit or a business credit card are better options for your business.

In particular, lines of credit and credit cards are better for situations where you need money quickly or need only a small sum of money. While you wouldn’t take out a business term loan without a fair amount of planning and a fairly long application process, lines of credit and business credit cards are designed so that you have the cash available when you need it; they are better for cash flow problems, emergency funds, and other situations where you don’t have time to apply for a business term loan.

Credit cards have an additional advantage because you can use them to solve cash flow problems by deferring everyday payments to a later date. And, because credit cards offer rewards programs for using the card, you might be able to save a little money via cash back or points simply by using your card.

Naturally, however, there are many overlaps between potential uses for these three types of financing — all are commonly used for working capital and other cash flow needs. You’ll need to consider the scope of your project, as well as the following advantages and disadvantages of each financial product, to decide which is best for your business.

Small Business Loan Pros & Cons

Small business loans are usually installment loans (also called “term loans”), but might also be short-term loans. Loans are dispersed as one lump sum, and repaid in installment over a set period of time.

Loans usually involve high borrowing amounts and lower rates than other options, but they also have long application processes and you might have to pledge a personal guarantee, lien, or other assets in exchange for funding.

Pros

  • High Borrowing Amounts: If you need a large amount of money, a small business loan is your best bet. At a minimum, small business lenders will offer 15% to 25% of your annual revenue, but many lenders are willing to offer more. The size of your loan will depend on your annual revenue and projected revenue, your intended use of proceeds, the creditworthiness of your business, and other factors.
  • Low Rates: Some business loans, such as those offered by a bank or the SBA, will have lower rates of borrowing than credit cards. For example, while credit cards have APRs from 10% to 25% or higher, interest rates for a 7(a) loan from the SBA currently range from about 6.7% to 9.75%. That said, some online loans will have higher fees; use our Small Business Term Loan Calculator to calculate the APRs (and other borrowing metrics) on your potential business loans.
  • Longer Time To Repay: Business term loans carry longer times to repay than lines of credit and business credit cards. Some loans, such as some SBA loans, carry term lengths up to 25 years. For this reason, small business loans can carry small incremental payments, even if you are borrowing a large sum of money.
  • Unsecured & Secured Options: Businesses with collateral can leverage it to borrow money with very low interest rates. On the other hand, if you don’t have specific collateral, you will still be able to find a business term loan; the fees will be a little higher than they would be with a secured loan, but you will still have the money you need to grow your business.

Cons

  • Long Application Process: Business term loans tend to have a more detailed application process than credit cards. You will need to submit a fair amount of documentation and spend some time talking to an underwriter before you’re approved for a loan. Non-traditional online loans tend to have shorter application processes, but you will have to pay higher rates and fees. The application process can take anywhere from a few days to a few months, depending on the lender you’re working with. As a general rule of thumb, the longer the application process, the better rates and fees you’ll receive.
  • Long-Term Debt: While a small business loan generally entails smaller payments than other options, it also means that you’ll be paying your debt off for a long time. Outstanding debt might make it more difficult to find financing in the future, and you risk not being able to pay it back if something goes wrong with your business.
  • Blanket Liens & Personal Guarantees Required: While you can find loans that don’t require you to put up specific collateral, you’ll likely have to sign a personal guarantee and/or agree to have a blanket lien placed on your business assets.

Head over to our guide to installment loans for more information on small business loans.

Line of Credit Pros & Cons

When you gain access to a credit line, you’ll be able to draw from a sum of money, up to your available limit, at any time — no application required. You only have to pay interest on the amount that you borrow, and once it’s repaid, you’re free to borrow that money again.

Despite the benefits, lines of credit carry some drawbacks: the initial application can be somewhat time-consuming, and if you have variable interest rates they could change over time.

Pros

  • No Application To Borrow: After you gain access to a credit line, you will not have to go through an application process whenever you need funds. Typically, you’ll receive access to requested funds between a few hours and two days, depending on how your lender transfers funds.
  • Low Rate Of Borrowing: Lines of credit have very affordable rates and fees. In general, these will be lower than credit card rates and fees, and might even be lower than those of many small business loans. As you might expect, however, some online lines of credit will carry higher fees than you would be charged by a bank, credit union, or the SBA. To get an idea of what sort of rates you can get from online lines of credit, which have shorter initial application processes but might have higher rates and fees, check out a comparison of our favorite business credit lines.
  • Only Pay Interest On Borrowed Funds: For most lenders, you will only have to pay interest on the money you have withdrawn from your credit line. You will not have to pay interest on the funds you are not using.

Cons

  • Long Initial Application: While you can typically receive requested funds from your credit line within a couple of days, the process to get access to a credit line might not be so easy. Lines of credit can have fairly long application processes, including gathering a lot of financial documents and possibly talking to an underwriter. Some online lenders have shorter application processes (some are even automated and only take a few minutes to complete), but they will have higher rates and smaller credit facilities.
  • Variable Interest Rates: Lines of credit often have variable interest rates, which means that your interest rate will change along with the prime rate or a similar metric. If the prime rate goes up, your interest rate will also increase, and you will have to pay more for borrowing.
  • Potential Revenue Checks Before Borrowing: If you don’t borrow very often, lenders might want to take a look at your finances before letting you draw from your line. This additional check might cause a delay in your funds because you have to gather and send in the documents and await the lender’s decision before you’re allowed to access funds.
  • Blanket Liens & Personal Guarantee Required: To be approved for a credit line, you might have to sign a personal guarantee or agree to a blanket lien placed on your business.

For more information on lines of credit, check out our guide to lines of credit.

Business Credit Card Pros & Cons

Business credit cards are credit cards used for business purposes. You can use these cards to pay for goods and services up to your available credit limit.

Credit cards can offer your business savings in the form of rewards programs, and they can make it easier to keep track of purchases and defer payments to a more convenient time. However, if you don’t pay your card off in a timely manner, interest rates can be quite high.

Pros

  • Rewards Programs: Credit card issuers reward businesses for using their card. Depending on the card you have, you could earn points for travel or other expenses, or earn cash back, simply by using your credit card. In other words, as long as you pay off your debt in a timely manner, using a credit card can save your business a little money.
  • Signup Bonuses: On top of rewards systems, many credit card issuers offer bonuses when you sign up for, including earn points or cash back for putting enough charges on your card within a certain time period, or a 0% APR for a certain amount of time.
  • More Time To Pay: Credit cards are the easiest way to defer payments for everyday purchases to a more convenient date. You can use credit cards to smooth out your cash flow and pay at a time more convenient to your business.
  • Emergency Funds: As long as you don’t make a habit of maxing out your credit card, you’ll always have a little money at your disposal when you happen to need it.

Cons

  • Low Credit Facilities: Credit card issuers don’t typically grant you as large a credit facility as you’d be able to get from a line of credit or business term loan. Additionally, utilizing too much of your credit line can have a negative impact on your credit score, so you will have to consider the consequences of using too much of your available credit line.
  • High Rates: Credit cards tend to have higher interest rates than you might be able to get from a loan or line of credit. Typically, credit card rates range from about 10% to 25%, and rates for credit card advances can be even higher. Additionally, credit card rates are variable, which means that your interest rate will fluctuate along with the prime rate.
  • Fees: Credit cards can carry fees in addition to the interest rate, such as annual fees, late payment fees, balance transfer fees, foreign transaction fees, advance fees, and others. These fees can add up over time, which could impact the amount you actually save by using the credit card.

Final Thoughts

The financing option that’s best for you will depend on the needs and eligibility of the business. Small business loans are most appropriate for business growth projects and other situations in which you need a relatively large sum of money, whereas lines of credit and credit cards work well for situations in which you need a smaller amount of money quickly for business maintenance or growth. You might even find that your business would benefit from a combination of two or even three of these financing options.

Ready to find a loan, credit line, or credit card for your business? Check out these resources:

Bianca Crouse

Bianca is a writer from the Pacific Northwest. As a product of the digital age, she likes absorbing large amounts of information and figures she might as well pass it on. When not staring at a screen, she is probably foraging for food outside, playing board games, or harassing somebody with theories about that movie she just watched.

Bianca Crouse

Bianca Crouse

Bianca Crouse

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The Ultimate Guide To Improving Your Business Credit Score

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A good business credit score is important for a multitude of reasons. For one, it’ll help you get a business loan if you need one – and you never know when you might need some help. Additionally, a higher business credit score will result in lower rates on loan interest and insurance, meaning you’ll be paying less money every month. It will also allow you to separate your business and personal credit scores, since many new businesses that don’t have business credit rely on their personal credit to get loans and such. Finally, raising your business credit score will improve your business’s reputation and potentially win you more business; after all, your business credit score is public information that anyone can look up.

Okay, now that you know why you should improve your business credit score, let’s get on with the how. It’s actually easier than you might think!

Table of Contents

Establish Your Business Credit

The first step to improving your business credit score is to simply establish all of your business credit scores – that’s right, you will have multiple business credit scores, and you have to take certain actions in order to establish them. Personal credit scores are calculated by the same criteria and scoring system set forth by FICO, but the three business credit scoring agencies are more disparate in their calculations, and their scores all signify different things. Only once you establish credit with each agency can you work on improving these scores.

The Three Big Credit Agencies

The three major business credit scoring agencies are Dun & Bradstreet, Equifax, and Experian. As you may know, Equifax and Experian also perform personal credit scoring, but your personal credit score with these agencies is different than your business credit score.

Dun & Bradstreet

Dun & Bradstreet assigns something called a PAYDEX score. This score, which ranges from 1 – 100 (100 being perfect), primarily has to do with repayment of creditors and is of particular importance to lenders looking to make decisions about whether to grant your business a loan. To qualify for a D&B credit score, you need to register for a D-U-N-S number and have active trade lines with at least three vendors or suppliers (more on those topics in a bit).

While it’s free to register for a D-U-N-S number, you will have to pay between $61 and $188 to purchase a Dun & Bradstreet business credit report to see your score.

Equifax

Equifax has two different business credit scores: one that predicts how likely you are to skip payments to creditors, and another that predicts how likely your business is to fail. From Equifax’s website:

  • Business Credit Risk Score predicts the likelihood of a business incurring a 90 days severe delinquency or charge-off over the next 12 months. The score ranges from 101 – 992 with a lower score indicating higher risk.

order an Equifax business credit report for your company (or another company) for $99.99 per report. You can also order multiple reports at a discount, or pay a monthly fee to monitor your business credit report on an ongoing basis.

Experian

Experian assigns just one credit score, ranging from 1 – 100, that designates your risk to both vendors and lenders. You want your score to be as close to 100 as possible.

To establish an Experian business credit score, Experian requires at least one trade line and/or one demographic element, such as years on file, business size, and/or Standard Industrial Classification (SIC) code.

You can order a business credit report from Experian’s website for $39.95 or $49.95; Experian also has monthly and yearly subscription packages.

Unlike with Dun & Bradstreet, you don’t need to register for a proprietary number to get an Equifax or Experian credit score. However, in order for them to have enough information to go on, you will need to differentiate your business (as its own entity) from your personal identity with an LLC designation, employer ID number, and accounts in your business’s name. Which brings us to …

Register For Numbers & Titles

So let’s say the credit agencies don’t have enough information on your business to provide an accurate score or complete credit report. No worries. By registering your business for a few important designations, you’ll put your business on the map as far as credit agencies are concerned.

D-U-N-S Number

On the Dun & Bradstreet website, you can set up your D-U-N-S number for free. This is a nine-digit number that identifies your business’s physical location. You’ll need to have one of these in order to obtain a PAYDEX business credit score through D&B.

Many business organizations use D-U-N-S as a form of business identification and to check your business’s credit report.

Employer Identification Number

If you don’t have one already, registering for a federal employer identification number (EIN) through the IRS can help establish your business credit. In addition to identifying your business to creditors, having an EIN also allows you to stop using your personal social security number for official documents, thus separating your personal credit from your business credit.

Use the IRS’s online EIN Assistant Tool to get started with your EIN registration.

Limited Liability Company

Forming your business as a Limited Liability Company instead of a Sole Proprietorship has some important benefits, including establishing your business credit. As with registering for an EIN, restructuring your business as an LLC will help separate your personal and business credit because it differentiates your business as its own separate entity.

Rules on how to start an LLC vary somewhat from state to state, but here’s a useful resource with a few general steps for how to form an LLC.

Incorporating your business is another option.

Open Accounts In Your Business’s Name

Opening accounts in your business’s name will also put your business on credit agencies’ radars. All of these accounts need to be dedicated specifically to business purposes, meaning you can’t use the same account for personal business. Some important accounts to open include:

  • Business bank account
  • Business phone line (listed)
  • Business credit card

Besides helping separate your personal and business finances and establish your business credit, a business credit card will also help build your business’s credit score. Just keep in mind that you’ll need to practice good credit habits — such as keeping your debt-to-credit ratio low and making all payments on time.

Vendors & Your Credit Score

Setting up business trade lines with vendors — i.e., “accounts payable” relationships — helps demonstrate your business’s ability to make payments on time. Even if you don’t strictly need this sort of arrangement for your business, you can still set one up to help boost your credit score – you could, for example, set up a trade line with your office supplies or drinking water distributor. Note that D&B requires businesses to have at least three trade lines with vendors and four payments on file before they will even assign a PAYDEX score.

It’s also important to note that that you need to work with vendors that report your payments to the major credit bureaus for your trade lines to positively impact your credit score.

Repay Your Debts

To get a perfect business credit score, you don’t just need to repay your debts on time; you need to repay them early. This includes payments to suppliers, service providers, and any other entity to which you owe money. If you pay all your vendors on time, you will likely get a PAYDEX score of about 80, but if you pay them early you could get a perfect 100 score.

Remove Negative Marks

I’ve dedicated most of this article to the topic of building business credit by establishing it in the first place, as many small business owners rely on their personal credit for their business. However, it may be the case that you do already have a business credit history, and it’s not a good one. Depending on the nature and severity of the credit infraction, you might be able to remove that blemish from your record.

Check out this resource on how to remove negative marks from your credit report.

Business Loans & Credit Score

Having a small business loan in good standing will help build or improve your business credit. However, if you have no business credit or you have bad credit, it will be difficult to obtain a business loan. In such cases, you may have to take out a loan in your personal name and/or find a lender that does not check your credit in order to get that capital you need.

Business Line Of Credit

While any business loan is good for building up your credit, a business line of credit is an especially easy way to help bolster your business’s credit score. If you have a line of credit, you have access to a sum of money, but you only have to pay interest on the amount you borrow. Lines of credit may also be easier to qualify for than actual term loans, especially if you choose an online line of credit such as Bluevine, Kabbage, and others.

Business Loans For Bad Credit

If you’re reading this post because you need to get a loan for your business ASAP but have poor business and personal credit, you might consider getting a loan with no or low credit score requirements. Just make sure you read the fine print, because you may have to sign a personal guarantee and a UCC blanket lien on your business assets. Here are a few good lenders to consider for businesses with poor credit:

However, be aware that lenders might not report to the credit agencies. If you’re taking out a loan to improve your credit score, ask potential lenders if they report to credit agencies before accepting a loan.

Looking for a lender that doesn’t check your credit at all? Head over to our article on 5 Business Loans With No Credit Check.

Managing Your Credit Profiles

Once you know what your business credit scores are, you can start to work on improving them. But that’s not the only thing you need to do; it is also advisable to monitor your scores on at least a semi-regular basis by checking your reports from time to time – at least once a year. Additionally, you will want to correct any mistakes on your business credit profile that could be negatively affecting your score. All of the credit bureaus provide a process to correct inaccuracies on your report, like an inaccurate SIC code or wrongfully filed UCC lien.

More Tips

Finally, here are a few more things you can do that might boost your business credit score.

  • Fix your personal credit (some lenders check personal as well as business credit)
  • Deal with any judgments, liens, or other black marks on your report
  • Avoid behaviors that hint at risk, such as closing any business-related accounts
  • Keep revolving debt low
  • Stay on the right side of the law in terms of business taxes, business licenses, insurance policies, etc.

Final Thoughts

Building up a strong credit history for your business can help your business in a lot of ways. You’ll be able to increase your borrowing limits, qualify for lower interest rates, limit your personal liability in business dealings, keep your personal credit lapses from hurting your business’s reputation, and more. While most startups rely on personal credit to get things off the ground, once your business is up and running you can establish business credit in just a few easy steps. After your business credit profiles are firmly established, you can build up your scores by simply paying your bills on time (or, ideally, early) and exercising other good credit practices.

Shannon Vissers

Shannon is a freelance writer and editor based in San Diego, CA. Shannon has a three-year-old daughter named Izzy. Shannon likes to unwind by watching trashy reality television and reading literary fiction during the commercial breaks.

Shannon Vissers

Shannon Vissers

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Everything You Need To Know About Secured Business Credit Cards

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If you’ve been comparing business credit cards online, there’s a decent chance you’ve come across some secured cards. If you aren’t sure what “secured” means or how to compare secured cards to other business credit cards, we’re here to help.

Read on for everything you need to know about secured business credit cards.

Table of Contents

You Won’t Want A Secured Card Unless You Need One

There may be a few rare cases where this is untrue, but for the most part, a secured credit card is a good option only when unsecured credit cards are unavailable to you.

Secured business credit cards do offer rewards similar to many of their unsecured counterparts. At the same time, your selection of cards will be limited. Not only that, but your interest rates will probably be higher than they would be with a similar unsecured card.

What Makes A Card Secured?

Have you ever lent yourself money? The concept sounds kind of absurd, and in a way it is.

Secured credit cards require you to put down a security deposit when you sign up for them. The bank will then use that security deposit to establish your credit limit. So if you put $200 down, you’ll have a $200 credit limit. If you’re lucky, the bank will apply a small multiplier to your deposit.

Why would you do that? If it helps, you can think of it as a strategic money transfer between your different accounts that maximizes the efficiency of your money.

How Secured Cards Can Help

Secured credit cards are a way for business owners who have recently filed bankruptcies to access revolving lines of credit. Many of these individuals may find it difficult to be approved for an unsecured business credit card.

The security deposit removes the risk from the bank, and the cardholder is able to access rewards and perks similar to those they would get with unsecured business credit cards.

More importantly, a secured business credit card becomes an easy way to repair your credit. Just be aware that banks aren’t always consistent about how they report business credit card activity. Some will report to a consumer credit bureau. Some will report to business credit bureaus. Some will report to both. Some will report to neither. Be sure to find out before you sign up.

How You Should Use A Secured Credit Card

Secured business credit cards usually have very low credit limits, so it’s difficult to get yourself into too much trouble by using them. That said, you should use your secured card judiciously, avoiding spending more in a month than you can pay off that month.

As for what you should spend it on, that depends on the type of card you get. Some cards return a small amount of cashback for every purchase you make. Others use a multi-tiered system that might reward telecommunication expenses at 3 points per dollar and general expenses at 1 point per dollar. You’ll get a better return on your investment if you use the card for purchases that maximize your reward points or cash back.

What Are The Drawbacks?

For starters, secured business credit cards come with all the same risks of unsecured business credit cards. Business credit cards aren’t governed by the same regulations that consumer credit cards are. That means you’ll need to be on guard for surprise rate changes, floating due dates, and fast and loose terms of service.

Secured credit cards come with a few additional risks, however. The big one is higher interest rates. If you pay off your card’s balance every month, you don’t have to give interest rates too much thought (just watch out for that aforementioned floating due date). That said, if you can avoid getting charged usurous fees if you miss a payment, you should. With a little research, you should be able to get a secured credit card with a reasonable APR.

The other things to look out for are miscellaneous fees. It’s not unusual for even unsecured business credit cards to carry annual fees, but secured business cards can come with even more charges, including application fees, maintenance fees, and processing fees. Avoid as many of these as you can.

How Long Should You Have A Secured Business Credit Card?

The answer is, of course, no longer than you need to. You should expect to have to use a secured business credit card for about a year. After that, a bank will usually offer you an unsecured credit card.

In the event that the issuing bank doesn’t offer you a new card, don’t be afraid to ask to be promoted to an unsecured card.

At that point, you should have your security deposit returned to you. Unfortunately, you don’t usually earn interest on your deposit.

Final Thoughts

A secured business credit card should primarily be viewed as a road back to decent credit health. Remember, however, that it isn’t necessarily the best or only path you can take. Some banks also offer high-interest, low-limit unsecured credit cards to customers with poor credit. Avoid offers that pile on the fees, and you should be back to normal unsecured credit card usage in no time.

Looking for a good unsecured card instead? Check out our 2018 business credit card guide.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

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Who Is Responsible For Business Credit Card Debt?

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Business credit cards are a useful way for anyone in your organization to make purchases, all while earning reward points. But while swiping the card may be easy, it raises questions about who is ultimately responsible for the purchases made with the card. The swiper? The business owner? The business itself?

If you’re confused about who is responsible for business credit card debt, read on.

Table of Contents

The Personal Guarantee

In most cases, it’s pretty easy to figure out who is ultimately responsible for business credit card debt. Typically, a credit card company will require the business owner to sign a personal guarantee.

What this means is that, even though the business credit card is technically taken out in the name of your business, the creditor can try to collect on you, personally. This bypasses some of the protections granted to your personal assets by your business’s corporate status.

If you’re worried about creditors knocking on your door after they’ve squeezed all the blood from your business, you may want to think twice before signing a personal guarantee–and scrutinize the ones you do sign.

Personal guarantees come in limited and unlimited forms. An unlimited guarantee is a great deal for your creditor. Under that agreement, you can be held responsible not only for your debt, but for any legal fees associated with collecting that debt. As you might guess, signing an unlimited guarantee is far from ideal.

Limited guarantees come in a couple different forms, but in most cases they assign liability between multiple parties. You’re most likely to see this arrangement if you have business partners, but it’s possible, at least in theory, to negotiate an unlimited guarantee down to a limited one.

Does That Mean The Owner Is Always Personally Responsible?

While a personal guarantee sounds pretty straightforward, in practice it’s far from an air-tight contract.

A side effect of pushing the responsibility onto the business owner is that it can make the debt subject to personal bankruptcy protections. In those cases, your business credit card debt is treated like personal debt.

Even if you don’t declare bankruptcy, a personal guarantee doesn’t necessarily entitle the creditor to declare open season on all your property. To collect anything, they’ll need a legal judgment against you. Depending on your balance, your creditor may decide your debt isn’t worth the trouble.

Is There A Way To Avoid A Personal Guarantee?

You might be noticing a theme so far: there are few certainties in the world of business credit cards. And what do you know? It applies here as well.

The default terms for almost all business credit cards include a personal guarantee, so it won’t be a matter of hunting down a rare, plastic unicorn. On the other hand, banks are more inclined toward negotiation with established customers. You stand the best chance of having a personal guarantee waived if you’re applying for a business credit card from a bank with whom you’ve previously had a relationship.

Bigger businesses and corporations may also be able to use the heft of their enormous accounts to negotiate better business credit card terms with their bank.

Who Is Responsible If You Avoid A Personal Guarantee?

If you circumvent the personal guarantee, your liability for unpaid debt will depend on the way your business is organized. That means limited liability corporations (LLCs), C-corps, and S-corps will, in most cases, have the protection from personal liability that you normally enjoy.

Final Thoughts

Business credit cards come with personal risks. Be sure to understand what your liability is and which assets will be exposed should you default. And, if you can, negotiate a deal that will leave you as protected as possible.

Looking to compare business cards? Check out our 2018 business credit card breakdown.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

What Are The Risks Of Using Business Credit Cards?

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Business credit cards offer a variety of enticing perks to companies that use them skillfully. But with those tempting rewards come a unique battery of risks that can catch unprepared businesses off guard.

Here are some of the risks that come with using business credit cards…

Table of Contents

Interest Rates

The most obvious risk you take when using business credit cards is accruing interest.

Business credit card APRs typically fall in the mid-to-high teens. If you carry a monthly balance on your business credit card, interest will begin to accrue on your account. This interest is an additional, and often unnecessary, business expense.

To figure out how much you’ll be spending in interest, divide your APR by 365. So, if your APR is 18 percent, your daily interest rate will be 0.0493 percent. In other words, if your balance on a given day is $1,000, you’ll accrue 49 cents in interest on that day.

As you can imagine, those small charges add up very quickly. Most carriers will offer a grace period to make payments without being charged interest, but you’ll need to keep an eye on your bill to see if you’re meeting them. Unlike personal credit cards, there’s no set, legally enforced interest-free window.

Bait & Switches

Personal credit cards are governed by the Credit CARD Act of 2009. This legislation ensures that cardholders get 21 days to pay their bills, won’t be subject to retroactive rate increases, will receive ample warning before rates are increased, and will have payments applied to their highest APR items first.

Unfortunately, those protections do not apply to business credit cards. That means credit card companies can change your rate, and even your billing date, with little warning. In a worse case scenario, this can leave you facing charges you aren’t prepared for or make it more burdensome to pay off standing debts.

This doesn’t necessarily mean your credit card company will be pulling shenanigans with your account, but you need to be on guard for it. Be especially wary of changes if you miss a payment, as they’ll often be used as a rationale for tinkering with your terms of service.

You’ll also want to be aware of less nefarious tactics like introductory offers. You may be expecting them to expire, but did you know your credit card company can revoke them at any time, for any reason?

Needless to say, keep an eye on your statements.

Affect On Your Credit Report

At this point, business credit cards are probably sounding like the wild frontier of revolving lines of credits. Unsurprisingly, this can carry over to credit reporting.

There’s no industry standard governing what bureaus your credit card activity is reported to, or if it’ll be reported at all.

This means that some companies will report your business credit card activity to commercial credit bureaus. Others will report it to consumer credit bureaus. Some will report it to both. Some will report it to neither.

So if you’re hoping to create a partition between your personal and business credit, you may have a hard time doing it with a business credit card. This can also make it difficult for you to use a business credit card to repair your personal credit.

If you’re concerned about how your business credit card usage shows up on credit reports, be sure to contact your credit card company and find out what their policy is.

Debt Responsibility

Depending on how your business is incorporated, you may or may not be personally liable for business debts in general.

Business credit cards, however, tend to require a personal guarantor on the account. That means that you are responsible for those debts should your business close. On the other hand, that also means you can treat that business debt as personal debt if you file for bankruptcy.

Final Thoughts

Keep in mind that these risks are a collection of worst case scenarios. Many companies maintain mutually beneficial relationships with their business credit card providers. Nevertheless, it is a poorly regulated segment of the credit card industry that comes with a number of dangerous pitfalls. Just don’t be caught unawares.

Looking for a convenient rundown of some of the most popular business cards? Check out our comparison chart.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

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Business Credit Card Rewards: Everything You Need To Know

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One of the biggest perks offered by business credit cards, other than convenience, is rewards. Gamed correctly, business credit card rewards can be a way to save money on your biggest expenses.

Not sure which rewards are right for your business? Wondering what kinds of expenses to use your card on? Not even sure what’s out there? Read on!

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What Are Business Credit Card Rewards?

Simply put, they’re incentives to use your card to make purchases. When you make a purchase on your card, you’ll be awarded points or cash for each dollar you’ve spent. The number and type of points awarded vary by card. In many cases, where you’re spending it matters too.

How Many Types Of Rewards Are There?

A lot. In fact, many business credit card rewards cater to a specific type of spending. Overall, you can break them down into two broad categories.

  • Cash: This is the simplest, and oldest, kind of reward program offered by business credit cards. Cash rewards accumulate as you make purchases on your credit card. You may, for example, earn 2 percent back on every purchase you make. Depending on your carrier, you’ll have the option to redeem the rewards automatically at specific times of year, when you reach reward thresholds, or when you request them. Cash rewards can be redeemed as checks, statement credit and, in some cases, as gift certificates.
  • Rewards: Other business credit cards don’t return cash, instead awarding points or frequent flyer miles to cardholders. These cards tend to cater to specific types of business. For example, businesses whose staff frequently travel may choose a card that awards flyer miles. A business that spends a lot on telecommunications, on the other hand, may choose a card that rewards expenditures on those expenses. Other reward programs are more general, presenting you with a diverse (but limited) array of rewards to spend your points on.

What Are Reward Tiers?

Not all business credit cards have reward tiers. Cash cards almost never have them, for example, but many reward cards do.

Reward-based cards use tiers to influence your spending habits. For example, the Chase Ink Business Preferred Credit card breaks its reward point system into two tiers. For each $1 you spend on travel, shipping purchases, telecommunications, and social media advertising, you’ll earn three reward points. Any other purchases you make will be compensated with one point per $1.

Most cards that use tiers will have two or three of them. The lowest tier almost always represents miscellaneous purchases.

How To Choose The Right Reward

Business credit cards, ideally, reward a specific kind of spending behavior. With that in mind, it’s best to consider which rewards best sync up with your expenses.

This means you’ll probably want to itemize your monthly business expenses to see where you’re spending your money. You’ll also want to get the cash value of the reward points offered by any rewards cards you are considering (expect a value somewhere around a cent or two).

To make a comparison, pretend you’ve put all of your monthly expenses on the credit card and calculate the cash value of the points (or cash back) you would get for making those purchases. So if you have $800 of expenses that qualify top tier points (3) and $1,000 of miscellaneous purchases, you’d be earning $34 worth of rewards each month or $408 per year.

If your expenses aren’t concentrated in any specific area, consider cash rewards. You may not get as big a multiplier on specific purchases, but you’ll often recoup a better value on your miscellaneous purchases. Not only that, but you can spend your cash return on whatever you want. Consider cash as “breadth” to rewards’ “depth.”

What Else Should You Factor Into Your Reward Calculations?

You didn’t think it would be quite that easy, did you? Business credit card terms feature a large number of asterisks and footnotes. Here are some things you should also consider when calculating a card’s reward potential:

  • Sign-up Bonus: Many business credit cards will offer an initial sign-up bonus. This is a one-time offer and usually requires you to spend a minimum amount of money in order to qualify.
  • Annual Fee: Some business credit cards charge an annual fee to keep the card active. You’ll want to deduct this amount from your yearly reward value. Note that many cards will waive the first year’s fee.
  • Reward Limits: While it might be fun to think of ways to earn an endless torrent of reward points, your carrier is one step ahead of you. Some carriers will limit the number of top tier points you can earn. Others may stop rewarding points or cash for the year after you hit a spending threshold of, say, $150,000.

Final Thoughts

Remember that your business credit card should match your existing spending habits. Don’t fall into the trap of thinking you should have a specific card just because it’s popular or even well-reviewed.

Need help getting started? Check out our 2018 business credit card comparisons.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

“”

The Dos And Don’ts Of Business Credit Cards

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Business credit cards offer one of the most convenient ways for your company to borrow money for goods and services without having to have your purchases scrutinized by a lending institution. Best of all, the revolving credit offered by your card means that as long as you pay off your card on a regular basis, you will always have access to a certain amount of money.

But like all forms of debt, business credit cards have downsides and come with fine print that can leave an unprepared business spending far more money than they should. Below, we’ll explore some of the do’s and don’ts of business credit cards.

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DO

Be Aware Of Terms & Fees

Credit cards come with a lot of fine print detailing everything from introductory APRs to how your reward points are calculated. The more transparent carriers will take pains to make you aware of the important details, but beware of asterisks lurking near numbers. Business credit cards don’t have as many protections as personal credit cards, so you’ll want to know if (and when) your carrier can raise your interest rates.

Choose The Type Of Rewards That Best Suit Your Business

Perks are a big part of what distinguishes one business card from another. With some rare exceptions, perks fall into one of three categories:

  • Money Back: For every x amount of money you spend on your credit card, you’ll get a percentage of the expenditures back as cash. Depending on the carrier, this money may be returned as a check, a bank deposit, a gift card, or credit to your account.
  • Rewards: This is a catch-all for a number of different reward schemes, where you’re credited x number of points for each dollar you’ve spent. These rewards can be redeemed for goods and services from selected vendors.
  • Mileage: If you do a lot of long-distance traveling, some business credit cards use frequent flyer miles as rewards. As with the other types of rewards, you’ll earn x number of miles for each dollar you spent.

Be Aware Of Reward Tiers

As important as selecting the right reward type for your business is understanding how to maximize your rewards. Rewards are usually broken up into two or three tiers (although some don’t have tiers). In most cases, the tiers correspond to the multiplier applied to each dollar you spend. You may, for example, earn 3 points per dollar you spend at restaurants, 2 points per dollar you spend at gas stations, and 1 point for each dollar you spend on other purchases.

Ideally, you’ll want to use your card for purchases that earn you the most reward points.

Calculate The Earning Potential Of Your Card

An easy way to figure out which card is best for you is to break down your monthly credit spending into categories like travel, telecommunications, and office equipment. You can then choose a card that will give you the biggest return on your expenses.

Create A Credit Card Policy If Your Employees Will Be Using It

Since business credit cards are for business expenses, the owner isn’t necessarily the only person who will be using it. You’ll want your employees to be aware of how and when to use the card, and how to maximize its value.

DON’T

Pay Too Much In Annual Fees

One of the easiest business credit card fees to avoid is the annual fee. Unlike most personal credit cards, business credit cards frequently require a yearly fee to keep active. These fees usually range from ten to a few hundred dollars. Many cards will waive the first year’s fees, so make sure you know what you’ll be paying over the long term.

Leave Balances On Your Card Longer Than You Have To

You can file this under general credit card advice, but it’s worth remembering: the longer the cost of an item remains on your credit card, the more that item effectively costs. Why would you pay a higher price than you have to? And best of all, you’re still earning rewards!

Use Your Card Recklessly Just To Earn Rewards

As nice as the rewards are, they can be a trap if you adopt the wrong mindset. Running up unmanageable balances in the hopes of maximizing your rewards points will leave you with a net loss.

Use Your Business Card For Personal Expenses

You won’t get in trouble for it, but it’s a best practice to avoid mixing personal and business expenses. At best, it’ll complicate your bookkeeping. If you’re running a small sole proprietorship with minimal expenses, you may want to just use your personal credit card.

Ignore Prerequisites For Sign-Up Bonuses

Many business credit cards offer sign-up bonuses. In most cases, you’ll need to spend a minimal amount of money before those sign-up bonuses kick in. Factor them into your calculations.

Final Thoughts

A business credit card can be a powerful tool for your business. For a side-by-side comparison of popular cards, check out our 2018 business credit card feature.

Chris Motola

Chris Motola is an independent writer, journalist, programmer, and game designer who has mastered the art of using his laptop in no fewer than 541 positions, most of them unergonomic. When he’s not pushing keys or swiping screens, he’s probably out exploring urban or natural environs, experimenting in the kitchen, or delighting/annoying his friends with his ideas and theories.

Chris Motola

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