A credit card that is issued to a company rather than an individual and is intended for use by the company itself is known as a business credit card. Credit cards for businesses are available to companies of any size, and they can assist these companies in constructing a credit profile that will improve their future borrowing terms.
KEY TAKEAWAYS
- As opposed to personal credit cards, which are utilized by individuals, business credit cards are intended to be utilized by businesses. Personal credit cards are utilized by individuals.
- For the purposes of record-keeping and paying taxes, having a business credit card can be an effective way for owners of small businesses, in particular, to keep their business and personal spending distinct from one another.
- Business credit cards frequently come with unique perks, but they lack some of the consumer protections that are mandated for credit cards issued to individuals. Credit cards for individuals are required to comply with certain regulations.
How the Use of a Credit Card in Business Operates
Credit cards for companies can be obtained from a multitude of different financial institutions. The application process is very much like how one would apply for a standard credit card. It is possible for business borrowers to apply for a credit card either with or without an employer identification number (EIN), which makes it simpler for small businesses to acquire a card.
The application process for business credit cards is typically automated, and applicants receive an instant credit decision. This makes obtaining a business credit card much simpler than obtaining a non-revolving business loan.
The interest rates attached to business credit cards are typically a little bit higher than the rates attached to traditional loans. The reason for this is that credit card debt is typically unsecured, which means that lenders are taking on a greater level of risk. (Some lenders also offer secured credit cards, which can be helpful for companies that have little to no history of credit use.)
Either a previously established Employer Identification Number (EIN) or the applicant’s personal Social Security number (SSN) can be used for the application process. All of the information that is included in the credit application will be considered by the lender when conducting the underwriting analysis. Any transaction that involves the use of an EIN will be recorded in the company’s credit report because businesses have credit reports and build a credit history in the same way that individuals do.
Advantages of Using Credit Cards for Your Company
When compared with their consumer counterparts, credit cards for businesses come with a number of benefits that are exclusive to themselves. Take, for instance:
Managing Expenses
Credit cards for businesses can be a useful tool for keeping track of and accounting for a company’s various expenses. Business credit cards, in addition to offering the usual conveniences associated with credit cards, help small business owners in particular keep the money they spend on work-related expenses separate from the money they spend on personal expenses.
Accounting and tax purposes both stand to benefit from this separation. In addition, the cards make it simple for employees to make purchases, while also enabling businesses to keep track of the goods and services purchased by their personnel.
Advantages Not Found Elsewhere
Credit cards geared toward businesses typically come with a variety of perks that aren’t available to consumers cards. It’s possible that the benefits that are provided to individual customers are different from these. Some business credit cards, for instance, provide cash back on purchases made at stores that businesses are likely to frequent, such as stores that sell office supplies.
Because financial institutions anticipate higher levels of spending by businesses, business credit cards typically come with more generous sign-up bonuses than personal credit cards do. Additionally, many of them will provide an introductory rate of 0% interest for a specific amount of time.
In addition, many companies provide their employees with travel perks because many businesses have significant travel expenses. During business travel, the holder of a business credit card may be eligible to receive discounts on hotel stays as well as access to the VIP lounge of a participating airline.
In addition, business credit cards may provide more forgiving repayment terms, which are tailored to appeal specifically to companies whose cash flow may be unpredictable.
Cons of Using Credit Cards for Business Transactions
However, business credit cards come with a number of significant drawbacks that should be taken into consideration. These include the following:
Personal Guarantees
A lender may ask for a personal guarantee from a business owner or another individual if the company does not meet the minimum requirements for credit scoring or another type of analysis that determines a company’s creditworthiness. This is common because many businesses do not have the minimum requirements necessary. A contractual provision known as a personal guarantee makes the person who is applying for the credit card liable for the ongoing payments and fees associated with the card.
Because the majority of business credit card agreements include a personal guarantee provision, regardless of the business’s creditworthiness, it is imperative for borrowers to read the agreement in its entirety and fully comprehend all of the terms that are outlined.
If the lender implements the personal guarantee provisions for repayment, then any delinquencies on the card could be reported on the individual’s credit report, which would hurt the individual’s credit score. If the lender does not implement the personal guarantee provisions, then the individual’s credit score would not be affected.
Fewer safeguards for the consumer market
Business credit cards are generally exempt from the new regulations, despite the fact that Congress has strengthened consumer credit card protections, most notably through the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act), which was passed in 2009. As a consequence of this, the consumer protections that many people consider to be standard when it comes to their personal credit cards — such as the prohibition on interest rate increases on existing balances — may not be applicable to their business cards.
In spite of the fact that some card issuers have voluntarily extended some of these protections to their business credit cards, applicants shouldn’t assume that this is the case unless it is specifically stated in the card agreement.
