Picking out a credit card for your business isn’t as intuitive as you may think. Why? Because the banks don’t always do a good job explaining how they really work. Here are 3 tips every entrepreneur needs to know before applying for one.
1. Not every card will help build credit. When you apply for personal credit cards, no matter what type you apply for, they will show up on your credit report. So you would think business cards would work the same way, right? Unfortunately, they don’t!
Not every bank will report credit cards to the business credit bureaus (Dun and Bradstreet, Equifax Small Business Enterprise, and Experian Business). For example, American Express does not report any of their OPEN cards to the aforementioned credit bureaus. Therefore, AmEx isn’t a wise choice if you’re trying to build up a credit history for your company. In order to get a card from them that does report, you will want to apply for their “Corporate” card series – those require your company to already have extensive credit history and sizable revenue.
The good news is that most other major banks will report. The Chase Ink, Capital One Spark, CitiBusiness, and Bank of America Business cards will indeed show up on your company’s credit report (assuming you’re operating as a LLC or corporation). If you’re operating as a sole proprietor though, remember that’s not a separate entity so building credit for it isn’t possible.
2. Business accounts and debt are excluded from the CARD Act. As I’m sure you know, the Credit CARD Act of 2009 added greater protections for consumers. But what you might not know is that the law specifically excludes business accounts and debt.
That means you will still be susceptible to the ol’ tricks of unjustified APR hikes, excessive late fees, and the like. That being said – even though banks still have those rights – during the last couple years I haven’t heard of business cardholders falling wrath to these things. I’m guessing the reason for this is because banks don’t want to push their luck and draw more regulatory scrutiny.
Furthermore, you need to realize that it’s not just business credit cards which are excluded. If you use a personal card for business debt, then technically speaking, it no longer qualifies for the CARD Act protection. Of course that brings us to the question… how would a bank know if my debt is personal or business? The answer is they don’t (unless they were to do so some heavy investigating). So I think the odds of an issuer taking advantage of this loophole are slim, at best.
3. Business credit cards affect personal credit multiple ways. If you think the activity on your business card will be segregated from your personal credit report, think again.
For starters, you need to know that regardless of who you apply with, providing a personal guarantee will be mandatory. In order to apply for a business card without one, your company needs to have an established credit history and healthy cash flow (typically that means annual revenues of at least $2-5 million). Obviously, most entrepreneurs with younger companies won’t meet these qualifications and hence, they’ll be applying with their Social Security number as a guarantee.
This means that if anything goes haywire with your biz card, be prepared to have your personal credit affected. If the account were to get charged-off, you can bet it will be showing up on your personal report (and that will hurt your score just as much as if it happened with a personal card).
But even if your account always remains in good-standing, it still might affect your personal credit. Some banks will report biz cards to personal credit reports rain or shine. Capital One is one such example – your biz account will show up on your personal report no matter what. For most people this won’t be a problem (and can actually be desirable) but for any entrepreneur who carries a big balance, be aware that doing so can adversely affect your personal credit score (due to it creating a high debt-to-credit ratio).
So if you plan on using your biz card to finance big purchases, you may want to go with an issuer that won’t report it to your personal report. Chase and American Express are two such examples; as long as your biz account is within good-standing, it won’t show up on your personal report.
Mike has been an online entrepreneur since he was a teenager. His latest venture for the past 4+ years has been CreditCardForum, where he reviews credit cards. For his own LLC, he currently uses the Chase Ink but plans on getting the Capital One Spark in the near future. Thankfully, these days he only uses his business credit card for rewards instead of debt.