According to the Tower Group’s recent report, more than two-thirds of small businesses use their credit cards for various business expenses, but of those only about 40% are putting the charges on business credit cards. The other 60% are putting themselves at risk for personal liability and placing their personal assets in danger.
Business credit cards can be a great asset for your small business, but only when used correctly. When used incorrectly, business credit cards can cause many problems including a lack of business credit, tax and legal consequences, and a failure to achieve the best financial rewards for your business.
All of this can be avoided by first understanding how to effectively use business credit cards, then figuring out how to put them to work for you.
Here are three truths you may not have known about business credit cards.
1. The Same Rules Don’t Apply
The Federal Reserve’s CARD act made sweeping changes in the credit card industry, providing consumers with protection against credit card companies that would arbitrarily increase their rates or charge questionable late fees. Credit card holders now have to be at least 60 days late in order to qualify for an interest rate increase, and the card issuers can’t raise rates at all when the account is under a year old. Those sound like great benefits for a small business trying to get a leg up by using credit cards to carry some balances, right? Unfortunately, that’s not the case.
The new law only applies to personal credit cards – business credit cards are still subject to the old rules and regulations. If you decide to use your business card as a line of credit and carry a large balance on it, your interest rates could increase dramatically at the whim of the card issuer. Therefore, your small business budget and working capital projections would be in jeopardy.
Knowing this up front is important because it will likely change the way you plan to use your card. Charging things like gas, client expenses, and other small business related charges that will be paid off every month is convenient. It can also help in tracking expenses. However, carrying large balances should be avoided.
2. No Personal Asset Protection
Many small business owners take out a business credit card in order to protect themselves by separating their personal finances from their business ones. In most cases, including those of some incorporated businesses, this simply doesn’t work.
Just as with any application when choosing a credit card, a card issuer will look at the credit history of the applicant. The fact that the applicant happens to be a business won’t change this process. A business that’s just starting out, or one that has a spotty credit history, will likely need the personal guarantee of the business owner.
While it is possible to eventually gain a business credit card with no personal guarantee, it will take a lot of work. For instance, you’ll need a full Dunn & Bradstreet profile, along with some high-balance revolving accounts that have a clean payment history. Suppliers and vendors are more likely to issue credit to a business without a personal guarantee, although you’ll likely have to negotiate this in advance.
3. Walk a Fine Line
If you do manage to gain a business credit card based on business history alone, you should make sure that you never cross the line between personal and business charges. Doing so will open the door to debtors being able to make a claim on your personal assets if you’re ever forced into bankruptcy court. Even one personal charge may be enough for a judge to order that your personal assets be used to pay off your business debts.
Using a business credit card has many advantages, but it’s important to be aware of the laws and idiosyncrasies surrounding it. If you’re able to launch or run your small business without a credit card, fantastic! That’s the best thing you can do until your business credit is built up enough to attain a card of its own. Otherwise, you’re putting your personal credit and assets at risk.
Have you been able to get business credit without a personal guarantee? If so, we’d love to hear how you did it and what it’s meant for your business.