What Are Business Credit Cards?

If you're a small business owner, you've probably received numerous offers and applications for a small business credit card. They can be a convenient way to increase your company's purchasing power, enabling access to a revolving line of credit.

Small business credit cards provide business owners with easy access to a revolving line of credit with a set credit limit in order to make purchases and withdraw cash. Like a consumer credit card, a small business credit card carries an interest charge if the balance is not repaid in full each billing cycle. You may be able to get a credit card through your bank, or you can compare cards terms and features – and apply online – through our credit card tool. 

A business credit card can be a convenient way to quickly access financing for short-term needs and can increase your company's purchasing power. They are often marketed as an attractive alternative to a traditional line of credit. Like any source of financing, a business credit card comes at a cost and must be carefully managed.

Use of a Business Credit Card

Without a good system in place, it can be difficult to keep track of – and keep a handle on – credit card spending, which ultimately affects your bottom line. Certain strategies can be utilized to ensure good credit card practices. 

Ensure Accountability

"The most important step a small business can take to make sure credit cards are used effectively is to set up a bomb-proof accountability system," says John Burton, founding partner of Moonshadow Leadership Solutions in Bryson City, N.C. "This could mean everything from pre-approval of all credit card spending to rigorous requiring of receipts, to pulling credit cards from those who do not report completely and on time with receipts," says Burton. Have a system in place before the first credit card arrives and, Burton says, be consistent, rigorous and fair, and tolerate no exceptions. 

Deciding Who Receives a Card

Burton acknowledges the challenges employers may face in deciding who gets a credit card. "I've seen businesses that lost control of credit card spending by issuing too many cards to too many people, and thinking that all important officers and travelers needed the convenience of a company credit card," says Burton. While giving everyone a credit card might seem like the right or easy thing to do, it can lead to a "dysfunctional, expensive system, and a serious lack of control and accountability," he explains.

Use alternatives and establish rules. "Many companies, especially with salespeople, reimburse for company spending on personal credit cards with excellent accountability – i.e., no receipt, no reimbursement," says Burton. It is helpful, however, to have clear rules regarding who gets a card, whether it's based on seniority, position or some other factor(s). This can help avoid confusion and mitigate bad feelings from employees who would like a card but are not eligible.

Setting Credit Card Limits

Every business should have clear policies about spending, including which expenses can be put on cards, how much employees can spend and how often they can use their cards. It's important to put the policy in writing and have every employee who is issued a card read and sign it. After they do, give each cardholder a copy to use for reference.

Depending on the business card, you may be able to set up restrictions that limit transactions to a certain dollar amount, spending category and even certain days and times. With some cards, you can set up individual restrictions for each employee. For example, you may limit one employee to $50 a day any day of the week for gas purchases, while limiting another to $100 for gas and $50 for meals each day, but only on business days.

How to Be Watchful of Use

Many business credit cards allow you to set up activity alerts that arrive as text or email messages. The alerts can be set up to notify you each time a transaction takes place, or only if an employee uses (or tries to use) a card in an unapproved manner. You can also take advantage of online and/or mobile banking to view up-to-the-minute account activity. Your accounting department should review each statement to make sure each line item is a charge you authorized.

Using the Business Card Wisely

While credit cards are easy to use, they're not always the best choice, especially for large expenditures that can't be paid in full before interest kicks in. Even though it takes extra effort to secure a loan from a bank or other lending institution, it often makes financial sense to do so, since the interest rate on credit cards is typically much higher than for such secured debt instruments. It's also possible that a large purchase – or a couple of large expenditures – can max out your credit card and leave you without a source of funds at all. 

Business Credit Card Benefits

Along with providing the necessary cash flow to help maintain and build your business, credit cards can offer these advantages:

  • Easier Qualification: It can be easier for business owners who do not have a well-established credit history to qualify for a revolving line of credit with a credit card, rather than a traditional line of credit or bank loan.
  • Convenience: Credit cards are the ultimate in financing convenience. Business owners can quickly access funds for purchases or cash withdrawal, much more easily than having to find cash and/or use a checkbook.
  • Financial Cushion: A credit card can provide business owners with a much-needed financial "cushion" when accounts receivable are behind, or sales are slow and the business is short on cash.
  • Online Ease: Increasingly, business owners make purchases and do business online with vendors, contractors, and suppliers. Using a credit card makes online transactions easier.
  • Financial Bookkeeping Assistance: In addition to receiving a monthly statement, most cards provide small business card holders with online record-keeping tools to manage their accounts, including a year-end account summary, which can help a bookkeeper track, categorize and manage expenses. It can simplify bookkeeping, help when using outside professionals to navigate an audit and pay taxes, and provide an easy way to monitor employee spending.

Business Credit Card Disadvantages

Before rushing to apply for a business credit card, it's important to consider these potential downsides:

  • More Expensive: The convenience and ease of small business credit cards come at a price: They typically charge a much higher interest rate (1-3% over prime) than a small business loan or fixed line of credit offered by a bank. That interest can add up quickly if card activity is not repaid on time and in full each month. In addition, without a system to regularly and carefully monitor card usage, it can be easy to accidentally overextend your firm financially by going over your firm's credit limit or incurring late fees or penalties. 
  • Personal Legal Liability: Most small business credit cards require a personal-liability agreement (your personal security) to repay debt. This means that any late or nonpayment could result in a negative personal credit report and the inability to personally borrow money. You also may have to pay more with a higher interest rate.
  • Security Issues: Security measures should be created to ensure that cards or card information are not stolen by employees, vendors, contractors, and others who come through the office space. It's also important to make sure that employees who are authorized to use the card do not use them for personal spending, and that they take precautions when making online transactions to avoid being hacked.
  • Less Protection: Often, small business credit cards do not carry the same protection as consumer credit cards. For example, many cards will not provide the same level of assured services when disputing billing errors or needing to make merchandise returns. Be sure to review what level of protection and services a card offers before applying.
  • Fluctuating Interest Rates: Unlike a loan or fixed line of credit, the company that issues your credit card can reset the interest rate on your credit card depending on how you use and manage your account. As such, it can pay to be aware of how rates work and can change.