What to Know before Opening Your First Business Credit Card

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A business credit card is a valuable tool for just about any business. It doesn’t matter the size, the age or the business model—a credit card can provide much-needed convenience and efficiency when used properly. 

Whether you’re in the midst of launching a new business, or your business is established but doesn’t have a business credit card yet, it is important to understand a few key concepts. Here are six things you must know before opening your first business credit card.

Personal credit matters

The first thing to know is that it’s your personal credit, not the business’s credit, that will get you approved or declined for most business credit cards. So you’ll want to review your credit reports and scores and find out what range your credit scores fall into (good, very good, excellent, etc.).

Gathering this information helps you narrow down which cards to consider. If you have excellent credit, for example, you might target the “best” cards with the most valuable rewards. If your scores are not high, don’t panic, just research which cards approve lower scores.

Owners may be liable for the debt

As a business owner, you’ll likely be personally liable for the debt accrued on the business credit card. That’s because, along with reporting account activity to your personal credit reports, these cards typically require you to make a “personal guarantee” as well. 

What’s a personal guarantee on a credit card?

A personal guarantee, or an owner guarantee, is a legal agreement that you’ll take personal responsibility for debt if the business fails to pay. Many creditors require a personal guarantee for businesses that don’t have the credit or financial-track record to prove they can pay back their debt. 

Before applying for a business credit card, you’ll want to find out which of the following levels of liability you have to take on and decide if you’re comfortable accepting the responsibility:

  • Limited liability: You’re responsible for unpaid debt up to a certain dollar amount.
  • Unlimited liability: You’re responsible for the full account balance, including fees.

You also want to keep this in mind as you create your business’ credit card policy and make decisions about which employees are authorized to use the card.

You should only use the card for business expenses

You’ve probably been warned against “commingling” funds—or mixing your business and personal finances—and the same warning applies to your credit cards. 

Most business cardholder agreements stipulate that the card is “for commercial purposes only” (or similar language to that effect), which means you agree not to use the card for personal expenses. A creditor will not nitpick every single transaction to ensure it’s a business expense, but if you develop a pattern of using the card for personal expenses, it could lead to the creditor canceling your account. 

On top of that, using a business card for personal expenses makes it difficult to determine which expenses belong to the business, which can cause accounting problems, increase your personal debt liability and make it difficult to keep track of your own personal budget and spending.

You can build up business credit scores

Using a business credit card can help your business build up its credit scores. If your business has good scores, it can gain more access to capital with affordable terms, and you’ll be less likely to need personal guarantees in the future.

Not all business credit cards impact your business credit, but those that report to the business credit bureaus do. These are the agencies a creditor may report to:

  • Dun and Bradstreet
  • Experian
  • Equifax (via The Small Business Financial Exchange)

Just like with personal credit, you can ensure your business credit scores grow by making on-time payments, avoiding high balances and keeping the account open even if it’s paid off. Unlike personal credit, your scores will also be impacted by public records and information from vendors and suppliers.

Rewards can affect tax deductions

Some business credit cards let you earn rewards for your purchases. Depending on the card, rewards might include cash back that can be applied as statement credits to reduce your account balance or you might earn airline miles or other benefits. 

The good news is that these rewards aren’t taxable income. However, they can affect your business tax deductions. Consider speaking to a tax professional to find out how rewards impact tax filing, but the most important point to remember is that you cannot deduct the amount of a purchase that’s paid for with rewards.

Business credit should be managed like personal credit

Business credit is different from personal credit, but the same rule applies to both: your goal should be to manage credit wisely. This means never charging more than you can pay off each month. 

If you do carry debt from month-to-month, you’ll want to keep the balance as low as possible, and if you need longer term financing, you’ll probably get much better terms on a business loan.

Bottom Line

Having a business credit card can be incredibly helpful for a business, as long as it’s used the right way. If you avoid making unnecessary purchases, you pay off the balance each month and never use it for personal expenses, you can enjoy the convenience and rewards the card offers while simultaneously building up your business credit scores. 

In the end, using the card wisely can result in more access to affordable loans for your business, without you having to be personally liable for the debt.