Leveraging personal credit cards is a common, but surprisingly effective strategy, writes Odysseas Papadimitriou, founder of Card Hub, a Web site that helps consumers find the best credit cards.
Did you know that around 80% of small businesses use credit cards as funding sources? Perhaps.
Did you further know that business credit cards are actually ill-suited to this application? Most likely not, as the need to use business credit cards for business is one of the biggest credit-card myths out there.
However, with mistakes comes opportunity. And the ability to invest in your company in a safe, predictable manner is certainly an opportunity to improve business operations, gain an advantage over the competition, and accomplish what every small business owner strives for: long-term success.
Before we get to the best small business credit card strategy, there are a few things we need to clear up.
- Business credit cards do not prevent personal liability. Many small business owners believe that business credit cards protect them from personal liability for unpaid debt. However, all of the major issuers consider small business owners to be personally liable for business credit card usage, according to a Card Hub study. The sole difference between business and personal card use lies with the fact that both you and your company will be held accountable for business card debt.
- Business credit card information goes to your personal credit reports. The personal nature of business credit cards does not end with liability, as the aforementioned study also revealed that the major credit card companies relay information about business card use to your Experian, TransUnion, and Equifax credit reports.
- Business credit cards are not governed by the CARD Act. Despite the inherently personal nature of business cards, differences in branding apparently led legislators to exclude them from the personal-finance reform law that was implemented in February 2010 (CARD Act). The ramifications of this are many, but the most important is the fact that credit card companies can change a business credit card’s interest rates whenever they want, for any reason. With personal credit cards, on the other hand, they cannot increase the rate applied to an existing balance unless a cardholder’s delinquency reaches at least 60 days.
The obvious takeaway from this is that you should gravitate toward the lowest-interest-rate personal credit card when looking for plastic with which to fund your business. This will enable you to budget, make business plans, and allocate funds without the worry that you could wake up one morning to more expensive debt simply because raising rates was the simplest way for a credit-card exec to get his bonus.
At this point, it’s important to note that certain business credit card issuers have proactively applied various CARD Act protections to their business cards. Bank of America (BAC) even adopted the important interest-rate protection rule.
While you might therefore consider simply opting to use a Bank of America business credit card for all company spending, this isn’t the best course of action, for the simple reason that a single credit card is unlikely to offer both the lowest interest rates and the best rewards.
So where does that leave us?
Well, you can’t simply abandon business credit cards, because they are actually quite useful in many respects. Not only do they provide enhanced business tracking and management capabilities, but they also tend to offer more lucrative rewards than personal credit cards, and they enable you to give cards with customizable limits to employees and centralize company rewards.
Therefore, the best business credit card strategy entails using a business rewards credit card for company spending that will be paid in full by the end of the month, in addition to a low-interest personal credit card for funding. Doing so allows you to take full advantage of the law, garner the best rates, and benefit from the unique characteristics of a business credit card.
Most importantly, however, it paves the way for the highest possible returns from the investments you’ve made and will make in your business.
Odysseas Papadimitriou is the founder and CEO of CardHub.com.