Choosing a Card for Your Small Business

The use of credit cards has become an important part of managing a small business. Unlike large corporations, small businesses typically don't have a large reserve of cash on hand. Expenses occur at a regular rate (with some surprises, of course). But, income often comes in sporadically. The use of a business credit card can be a real lifesaver to help small business owners smooth out cash flow issues.

What to Consider when Applying for a Business Credit Card

There are many things to consider when choosing between small business credit cards. When choosing a business credit card, one of the best things you can do is get a summary of all the features each card offers and compare them side by side. You can do this by collecting brochures from each company, but there are websites you can access which compare major credit cards and shorten the time it takes for you to gather this information.

Interest Rate or APR

Once you have a summary of all the offers you are considering, it's time to look at individual features. The first one to consider is the interest rate. Interest rates on business cards have a huge range, from as low as about 8% APR to about 18% APR. A few percentage points either way can amount to huge finance charge savings for your business. Many business cards offer an introductory period of a year to 15 months with a 0% APR. Having a year or more to carry a balance with no interest could be a huge advantage, helping you buy the things you need to grow your business and be able to pay them off with much lower payments.

Annual Fees

Another important thing to consider is the required annual fees of the various business credit card offers. Annual card fees can vary tremendously, from no fee at all, to upwards of $150.00 or more. Some cards will waive the annual fee, but typically for the first year only.

Many business credit cards will also charge pretty significant late payment fees. These fees can be as high as $39.00 (or more) for a payment that is only a day or two late. This is in addition to any interest that has been incurred. Some cards also charge an "over limit" fee, incurred when the cardholder charges more than the maximum credit limit established for that cardholder. A small business owner needs to decide not only if these fees are affordable, but if they make good economic sense for the business when weighed against whatever benefits a particular card offers.

Grace Period

Another thing to look for in your business credit card is a grace period. A grace period is a time during which no interest is charged, as long as you pay your balance in full. A standard grace period is 20 to 25 days and is a great way for a business to "float" expenses without accruing interest charges. This can really help your business if you have expenses, and you know the income to pay for them should be arriving soon. For a business with bills to pay, a grace period amounts to a short term, interest free loan, allowing the business to cover its expenses in a timely manner at no additional cost above the principal. This can also be an effective way to "stretch" your payables to maximize your cash flow position.

Everyone would like to pay all their bills within the grace period, and never have to pay a penny in interest. However, in the real world this is not always possible. All kinds of unforeseen business expenses may arise, bringing the credit card balance to an amount the business owner is unable to pay in full. This is why the interest rate is something well worth considering in a credit card. Interest rates can vary from less than 7% to over 24% annual percentage rate (APR). High interest can add up to huge debts over a relatively short period of time. This is where free balance transfers, a feature offered on some small business credit cards can really help. Many cards offer low interest or even an entirely interest free period of up to a year on balance transfers.

Getting Rewarded

Rewards are another thing to consider and can be a very helpful feature of a small business credit card. Some offer airline miles, free gasoline, electronics equipment, store gift certificates, office equipment and more. Airline mile rewards can help to greatly reduce the travel expenses of a small business. And for some business credit card offers, the business may be able to choose a cash rebate, which is usually a small percentage of the total annual purchases. It makes sense to choose a card with rewards that are relevant to your business, or that can be used as valuable employee incentives.

Balance Transfers

Many business credit cards have a balance transfer option. This is particularly useful if your business already has some debt on a credit card with a higher interest rate. You can transfer this debt to your credit card and pay it off at the lower rate. There is generally a fee for balance transfers, but sometimes you can find a card that offers free balance transfers during the introductory period. And, if you are lucky enough to have found a card with 0% interest for a year, your business can save even more by transferring debt during this time.

Cash Advances

Sometimes a business needs cash right away for an expense that cannot be charged on a credit card. This is why some cards offer cash advances. Cash advances generally do not have a grace period, and interest rates vary.

Customer Service

Finally, an important feature of any business credit card is the customer service provided. Most of us hope that we'll never have a problem with our card. But problems do occur, and it's important to know that you’ll have good customer support for when it does happen. To find out about customer service, you might want to check out some of the websites online that rate various cards by customer satisfaction. And it never hurts to speak with associates who may already have one of the cards you are considering.

Combining Personal Expenses with the Business

A few words of caution … for the first few years while using a small business credit card, personal and professional finances are one and the same. Until a business has a proven track record, the personal liability for a business card is identical to that of a personal card. If the business is unable to pay its debts, a creditor can legitimately come after the individual who signed the card for payment!

In addition, the records of a small business card will become a part of the business owner's personal credit reports. Even a few late payments could damage the credit score of the owner, and a large business balance will make the owner appear personally over-extended financially. Luckily, after a few years of paying in a timely manner, some lenders are willing to separate the business and personal finances and let the business stand on its own.

Another important thing to consider is that business cards often don't offer the consumer protection features which are standard on personal cards. This is most apparent in disputed charges, which cannot be left unpaid on business cards until the issue is resolved. Also, a business card company will not intervene on the part of the customer in the event of damaged merchandise, as with a personal card.

As with any financial decision, a small business credit card is something that should be well researched and thought through. Chosen and used appropriately it can be a valuable asset in cash flow management, flexibility, and establishing a solid reputation for a small business.