As loans dry up, banks funnel more small business lending through credit cards, and small business owners heed the call. According to the 2009 Small Business Credit Card Survey, credit card usage for business is on the rise.
But while credit cards allow you to make purchases and carry a balance from one billing cycle to the next, you do have to pay interest on that balance. Another kind of credit card for business that may be a better alternative is the business charge card.
A business charge card is a specific kind of credit card that has all the convenience of a credit card without the costly interest. The balance on a charge card account must be paid in full when the statement is received and can’t be rolled over from one billing cycle to the next like a credit card. Because you can’t carry a balance, a charge card doesn’t have a periodic or annual percentage rate; so there’s no rate for a charge card issuer to disclose.
The specific impact to your business credit is significant because charge cards won’t allow you to incur a revolving debt like a credit card. The larger the balances you carry on your business credit cards, the more harm it can cause in your overall debt-to-credit utilization.
While using a business charge card makes much more sense than a business credit card, there’s one other important factor to consider: A business charge card should only report your payment experience to your business credit files and not your personal credit files. This one vital ingredient will prevent you from putting your personal credit at risk every time your company makes a purchase using your company charge card.
In addition to protecting your personal credit, you also want to scrutinize your charge card to eliminate the comingling of funds — and this includes the comingling of credit profiles so that you won’t jeopardize the protection of the corporate veil.
So how do you know if the charge cards you use for business are putting your personal credit at risk? It’s quite simple. All you need to do is review your personal credit file and check to see if your credit usage and payments on that particular charge card are being reported. If so, then you are in fact using a business charge card that’s putting your personal credit at risk!
Currently there are more than 500 business credit/charge cards available in the marketplace, but less than 70 report your payment history to the business credit bureaus like Dun & Bradstreet, Corporate Experian, Cortera, PayNet, and Equifax Small Business.
In addition, there are less than 40 of these cards that will extend cash credit to your business without a personal guarantee. However, the only way you can obtain these types of cards is by first establishing a strong business credit file.
If you decide to start shopping around for a new business charge card that doesn’t impact your personal credit, pay special attention to the fine print and don’t hesitate to ask questions pertaining to how your payment experience is reported.
To select the right business charge cards for your company, avoid ones that include the following terms.
- You’re personally liable for all purchases.
- All charges and payments are reported on personal credit files.
- Charges impact personal debt-to-credit limit ratios.
Stay away from these types of charge cards because they do nothing to build your business credit files. The alternative is to select business charge cards that may require a personal guarantee, but your payment experience is solely reported to your business’s credit files, not your personal credit files.
One of my favorite types of charge cards is one that bases its approval solely on your business’s creditworthiness. This type of card is the best of both worlds. Once approved, your payment history reports solely on your business credit files, and there’s no personal guarantee keeping the liability strictly tied to your business.
I encourage you to be as proactive as possible by selecting business charge cards that report to the business credit bureaus. Don’t hesitate to inquire with vendors, suppliers, and leasing companies how they report your payment experience with them as well. The bottom line is it’s smart business to use business charge cards to save thousands of dollars in interest and build a solid business credit history.