When used properly, business credit cards can be one of most versatile financing tools at a small business owner’s disposal. The key to successful use of business credit cards is understanding when they are the right financing vehicle to be used, and when they aren’t.
Business credit cards should generally be used to meet short-term financing needs. In fact, cards can be a source of interest-free short-term financing if used wisely. That’s because most credit card companies allow a grace period before payment is due, during which time interest does not accrue. By timing purchases carefully, this can result in nearly two months of interest-free financing.
For example, assume your card’s monthly cycle runs from July 1 to August 1. If you make a purchase on August 2, it won’t appear until your September statement, and payment may not be due until the end of September.
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There’s a potentially dangerous flip side to this benefit, however. If payment is not made by the due date, the entire balance will be subject to interest rates that can be very high. Your interest rate will be contingent on your business’s credit score but could be up to 29 percent or higher. So you must be diligent about on-time payments if you want to use a business credit card as a no-interest financing tool.
Conversely, if your business has great credit and you qualify for a card with a relatively low interest rate, it might make sense to use your card for longer-term financing needs by carrying a balance month to month. In this case, the card would be similar to a revolving line of credit, enabling you to essentially “borrow” up to your credit limit and only repay the minimum amount due each month.
Keep in mind, however, that interest rates on business credit cards are usually higher than rates on personal cards, although some cards offer low introductory rates on purchases made during the first six months and balance transfers from other cards. Also, card issuers can usually raise rates with no advance warning if your company’s credit rating or payment history change. Therefore, be sure to monitor your credit carefully and make all payments on time because this is the main determinant of your business credit rating.
Another benefit of using business credit cards is the ability to take advantage of the many different types of reward programs offered by most credit card issuers. Through these programs, you can accumulate points that can be redeemed for merchandise, gift cards, frequent flyer miles, hotel stays, car rentals, and even cash. Many companies exchange points for merchandise to be used as employee incentives, such as rewards for top salespeople or employees of the month.
Most business credit cards also offer a wide variety of concierge and other specialized services to members. These usually include travel planning and assistance, travel accident and auto rental insurance, lost luggage reimbursement, emergency medical and legal assistance, and liability protection for unauthorized employee charges.
Using a business credit card for company expenses instead of a personal card helps you avoid commingling your business and personal expenses, a common mistake made by many small business owners. You’ll receive detailed year-end reporting of all card activity, which especially comes in handy when preparing your income taxes.
In addition, business credit cards can help you control and monitor employee spending. Cards with preset spending limits can be issued to key employees, and you can track their purchases via detailed monthly billing statements.
Visit CreditCards.com to compare the features and benefits of some of the most popular business credit cards.
Don Sadler is a freelance writer and editor specializing in business and finance.
