What is a business credit card and how does one work?

Credit cards are a part of our daily lives — a convenient way to pay for essentials (and splurges) with a tap or a swipe. Likewise, if you run your own business, a business credit card can help you pay for expenses required to purchase supplies and run your day-to-day operations. Like personal credit cards, business cards offer the ability to earn points, miles or cash back on your spending and finance large purchases.

When used responsibly, a business credit card can be a useful addition to your overall financial plan. Here’s what to know about this unique type of credit card:

What is a business credit card?

A business credit card is a type of credit card that’s designed for entrepreneurs and business owners, offering unique benefits suited to businesses of all sizes. A business card can help you pay for your fixed expenses, such as rent and utilities, and it can also offer a way to cover fluctuations in cash flow or cyclical needs — such as snow supplies or other seasonal demands.

Manage your business expenses

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Business credit cards vs. personal credit cards

Personal cards and business credit cards can differ in more ways than you’d expect. Here’s a breakdown of small business credit cards vs. personal credit cards:

How a business card works

Business credit cards work similarly to personal cards: You charge purchases on your card that are drawn from a line of credit and then, at the end of each billing cycle, you receive a credit card statement, which has an itemized list of purchases, a total balance owed and a minimum amount due.

If you pay your bill in full each month, you typically aren’t charged interest on those purchases. If you carry a balance past your grace period, though, you begin accruing interest on your balance based on your card’s interest rates. Generally, the more creditworthy your business, the more likely you are to get a favorable annual percentage rate (APR) when approved for your card.

That said, some business cards — like the Chase Ink Business Premier® Credit Card and Capital One Spark Cash Plus — are actually charge cards, which typically require payment in full each month. The main upside to charge cards is that they generally have no set credit limit.

They’re not the best choice for owners who are looking to pay off high startup costs over time, however, or for those with unpredictable income. But, the lack of a spending limit can make charge cards ideal for established businesses with big monthly expenses that are factored into the business’s budget.

Benefits of a business credit card

A business card’s credit line can come in handy for regular expenses, as well as the periods of fluctuating cash flow that come with running a business. This is because many business credit cards offer:

• High credit limits. Business cards are suited to business needs, typically offering higher lines of credit than consumer credit cards.
• Business expense tracking. These cards allow you to separate your business spending from your personal spending, which helps you maintain your accounts and prepare your tax returns, too.
• Extended interest-free periods. Some cards offer introductory APR promotions that last longer than the typical period for a personal credit card. This is often in the form of 0 percent introductory APR offers.
• Extra rewards. The best cards for business expenses offer better rewards on your spending than personal cards. If your industry requires regular travel, for example, you could earn cash back or points on flights, rentals and stays — for both you and any employees on your account.
• Business-related perks. You can score perks specific to business, such as free access to accounting software and service discounts for your business.
• Generous sign-up bonuses. These cards tend to offer stronger sign-up bonuses, also called welcome bonuses, than consumer cards, though often with an annual fee.
• Higher caps on category spending. Many premium business cards also offer higher category spending caps than you’d see on consumer cards, which could result in bigger monthly cash back bonuses that you can reinvest into your business.
• Employee cards. Business cards allow you to add employees to your account with customized limits on where and how they purchase items for your business geared to specific roles. You can review all employee spending activity and build points, cash or miles on employee purchases.

Disadvantages of a business credit card

While the benefits of a business card often outweigh disadvantages, you’ll want to know the potential downsides when deciding between a personal and a business card, too.

Here are some factors to keep in mind:

• Your issuer will likely require a personal guarantee. Many business card issuers require you to sign a guarantee that makes you personally responsible for any card debt your business can’t pay.
• Your card might come with high annual fees. Even if the strong rewards and perks might offset the annual fee, it can still feel like a hefty price to pay. The most expensive business cards charge annual fees of $500 or more.
• Your card won’t have CARD Act protections. Business cards don’t qualify for the same protections that consumer cards do under the Credit Card Accountability Responsibility and Disclosure Act of 2009 — more commonly called the CARD Act — such as a requirement to warn consumers of planned interest rate increases. Read your card’s fine print to learn about issuer protections that cover your business.

How a business card impacts your credit

To qualify you for a business card, your issuer will look into your credit history and personal credit score to determine your creditworthiness and likelihood of paying back what you charge on time.

Issuers want to know that somebody is accountable if your business has trouble repaying its debts — or, worse, goes out of business. So, it’s likely you’ll need to sign a personal guarantee that tells the issuer you’re personally liable for any debts your business can’t pay.

Most business card issuers report your debt and credit card usage to business credit reporting services, such as Dun & Bradstreet. Some of those issuers also report your business credit card activity to the major consumer credit bureaus, which is why handling your business card irresponsibly can potentially harm your personal credit score. Check your credit card agreement to find out who they report your debts and payments to and when.

If you use your business credit card responsibly, you’re rewarded with a stronger business credit score that can unlock bigger lines of credit and other business loans to grow your business — even if your personal credit is poor.

Applying for a business credit card

When you apply for a business credit card, the issuer asks for information about you and your business. You’ll likely need the following information:

• Your name
• Your address
• Your Social Security number
• Your Employer Identification Number (EIN) or Tax ID number
• The business name
• The business structure

You might also need to provide some information about your company’s financial situation, such as sales and profit figures, as well as information about when and where your company was established.

The bottom line

The best small business credit cards are geared to a range of business needs, offering the flexibility to keep up with expenses while helping you earn lucrative rewards on your and your employees’ spending in the process. These cards often offer bigger credit lines than a consumer card and tools that can help you keep track of accounting and ease filing your business taxes. Plus, they can help you build business credit, which you might need if you want to explore other financing opportunities in the future.

Start by narrowing down options to a card that fits your type of business, and then compare sign-up offers and rewards structures that fit your industry and business needs.