How Do Business Credit Cards Work?

Almost everyone eventually signs up for a personal credit card, but many businesses also leverage specialized business credit cards that perform similar functions. The fact of the matter is that many major purchases or expenses are out of reach for small businesses, at least if they tried to make cash payments.

But business credit cards let even low-budget businesses make purchases that help them stay afloat or expand to new levels of profitability. Indeed, business credit cards can be viable financial tools for business owners looking to make the most of every dollar they spend.

What Are Business Credit Cards? 

Business credit cards are what they sound like: credit cards designed to be used by business owners and their key employees. A regular credit card is primarily intended for personal purchases, such as buying a new TV, putting a down payment on a car, and other things.

In contrast, business credit cards are meant to be used for essential business purchases, including equipment, employee costs, transportation costs, and supplies.

Because of this, business credit cards typically have several major differences from regular credit cards, including:

  • A higher than average interest rate compared to a business loan
  • A higher credit cap compared to regular credit cards
  • Fewer (or no) personal credit score requirements

Since they are credit cards, business credit cards have lines of credit that do not expire or go away until both parties agree to dissolve the contract. So business owners can keep using business credit cards to make purchases so long as they make enough payments to leave some credit available.

Note that business credit cards do charge interest fees. So if you don’t pay off the full balance of your business credit card with each billing cycle, you will end up paying more based on the interest rate.

How Do Businesses/Individuals Qualify for Business Credit Cards? 

When you apply for a personal credit card, the credit card company looks at many factors related to your personal financial history. This process, of course, is necessarily different for a business credit card.

To qualify for a business credit card, most applicants need to have:

  • A good business credit score, which is not the same thing as a personal credit score.
  • A record of any business income if your business has already begun.
  • You must have the financial history of your business activities.
  • The estimated monthly spend helps card issuers determine what the credit cap for a business credit card will be.
  • Some business credit cards require a personal credit score, as well, but not all of them.

Naturally, business owners who already have a history of successful financial operations will have an easier time securing business credit cards for their use. But even new business owners without much financial history can get business credit cards so they can get their small businesses up and running.

Organizations like Seek Capital are great places to turn to if you need help securing business financing, such as through business credit cards, for the first time. 

Why Do People Use Business Credit Cards?

For a variety of reasons. Business credit cards provide what is essentially revolving credit for business owners, allowing them to make purchases even if they don’t have the cash on hand necessary to buy equipment or supplies.

A business credit card can be used to:

  • Purchase supplies for your office or greater business
  • Purchase expensive equipment that you might not otherwise be able to afford, such as cooking equipment, manufacturing equipment, tools, and more
  • Cover travel and other expenditures for your employees, particularly if they need to travel frequently
  • Cover the day-to-day costs of business activities, such as unexpected repairs on vital equipment

Business credit cards give business owners the financial flexibility and stability they need to run their businesses without having always to keep tons of cash in reserve. In addition, business credit cards can be better choices for covering emergency expenses since business owners don’t have to apply for individual loans each time an emergency crops up. 

Business Credit Cards vs Business Loans

Business credit cards are not the same thing as business loans, which are distinct financial tools appropriate for different things.

Remember, business credit cards are essentially the same things as regular credit cards, just with different application requirements and with different credit caps and interest rates. Business loans are fixed amounts of funds given to businesses to pay for things like:

  • Major purchases for expensive equipment
  • Purchasing retail or commercial property
  • Covering other debts or expenses
  • Covering the costs to expand to a new location
  • Making massive purchases of products or supplies

Business loans must be applied for, and applicants will qualify based on different financial criteria. If approved, business loans are deposited in lump sums into business bank accounts. Then business owners have a set amount of time to pay back the loan, usually through fixed monthly installments for payments (with associated interest rates, of course).

Business loans, however, are not as versatile or flexible as business credit cards. For example, business owners must apply individually for each business loan they take out. Some lenders also take several business days before deciding whether to approve the loan and fund your business account.

However, business loans can be secured for larger amounts of capital than many business credit cards allow. So if you need to make a massive purchase, such as buying some choice retail space for a new store, it might be smarter to pursue a business loan instead of trying to use a business credit card to make that purchase.

Do Business Credit Cards Affect Personal Credit Scores? 

Sometimes. Business credit is not always tied to personal credit, although it can be. Business credit is calculated based on a separate scale from the traditional credit score scale largely shared between all three major credit bureaus.

Business credit is grown in similar ways as personal credit is improved, however. By running your business over a long time, paying off your loans or credit card balances regularly and without incurring any fees, and by generally practicing good financial behavior, your business credit score will rise.

This will unlock more loans and better business credit cards with superior terms over time. However, if your business falters and if you don’t pay back your business loans or credit cards, your credit score could be affected.

This is especially true if your personal credit was used to approve your business credit card or a business loan.

The Perks of Business Credit Cards

Many business owners also use business credit cards because of the distinct perks that come alongside them. Like personal credit cards, some of the best business credit cards are often packaged with perks or rewards programs, like cash back incentives or travel insurance.

For example, a business credit card might offer cashback rates between 1% to 5%. These points can be accrued over time and then redeemed for rewards or for discounts on credit bills. Other business credit cards may offer perks for making specific purchases, such as travel or gas purchases, or for buying supplies for your business in bulk.

Put together; these perks can help business owners with relatively limited budgets make the most of every dollar spent.

Can Employees Use Business Credit Cards? 

Yes, though it is up to the discretion of the card owner or organization. Many business leaders issue business credit cards to their executives, traveling salesman, or other professionals in their organization may need to use the company line of credit from time to time.

Employees can use business credit cards to pay for travel expenses, supplies for the company, and for other things. However, business owners must be careful about who they give business credit cards to, as misusing the credit cards could lead to financial instability and bad results for one’s business credit score.

Only responsible employees who know how to practice good credit management should get the privilege of business credit cards.

Summary

All in all, business credit cards can be exceptionally flexible and useful financial tools for your organization, but only if you use them correctly and with good money management strategies. You should also try to secure business credit cards from worthwhile, business owner-friendly organizations like Seek Capital.

Indeed, we can help you secure financing for your business depending on your unique budget and economic needs. Contact us today for more information, and check out our blog’s other small business guides for more guidance on running your entrepreneurial enterprise!  

 

Sources:

Business Credit Card Definition | Investopedia

Business Credit Score – Get Your Company Credit Score – Small Business Credit Scores | Experian

What Is Revolving Credit and What Are Some Examples? | Credit Karma

Leave a Reply

Your email address will not be published. Required fields are marked *

Best Startup Loans of 2020 - Get Between $5,000 and $500,000

How much money does your business need?
Did you learn something from this article?

Get more great articles straight to your inbox!

Let us make it up to you with better articles straight to your inbox.

subscribe for more great funding ideas,
guides & how to's

We respect your privacy. privacy policy


Recommended For You

Charge Card vs. Credit Card: What’s the Difference?

While charge cards credit cards may physically look the same (you may even confuse the two while seeing them spelled out at a glance), these twin cards have two unique personalities.  Both serve as alternatives to cash. However, the way... Read More

Learn How to Process Credit Card Payments in QuickBooks Online

QuickBooks Online is a versatile and robust accounting platform for small and large business owners alike. It allows you to keep detailed records, send invoices, and even receive credit card payments from your customers: an excellent feature for freelancers or... Read More

3 Best Secured Business Credit Cards

Every business needs additional funding from time-to-time, but it may be difficult to qualify for a business loan if you haven’t established good credit history. Where do you begin? A good option to help build your business credit is taking... Read More

5 Cheapest Credit Card Processing Companies of 2021

Any business that wants to accept credit card payments needs the right processing equipment and software. It’s often worthwhile to accept credit card payments from your customers – it opens up another line of revenue and makes your customers feel... Read More

subscribe for more great funding ideas,
guides & how to's

We respect your privacy. privacy policy