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Small Business, Small Business Owners

What to Know before Opening Your First Business Credit Card

By Barry Coleman | Tuesday October 27th, 2020

first small business credit card

A business credit card is a valuable tool for just about any business. It does not matter the size, the age, or the business model—a credit card can provide much needed convenience and efficiency when used properly. If you are in the midst of launching a new business, or if your business is already established but does not yet have a business credit card, it is important that you understand a few key concepts. Here are six things you must know before opening your first business credit card.

Your personal credit score and history are important

The first thing you should know before opening a business card has nothing to do with your business or your creditor, and has everything to do with YOU. You should review your credit report and score, and make sure you know what range your credit score falls into (good, very good, excellent, etc.).

This is important because your personal credit history likely will be used in determining whether your credit card application is approved. Therefore, you will need to know your credit score to have a good idea of which cards you should consider. If you have excellent credit, then you can probably target any business card (including the “best” cards with favorable rewards). If your score is not as high don’t panic. You will just want to research which cards typically grant approvals to someone with your score and be strategic about which card to pursue.

You will be personally liable

Not only will your personal credit determine your ability to get a business card, but you will almost certainly be personally liable for your business card debt. That is because business cards typically require you to make a personal guarantee on the account. This is why your personal credit matters—the creditor will want to know how you handle debt personally because you will be ultimately responsible for the business credit card debt. And, this is why the creditor will require your social security number when you apply, even if you also provide an Employer Identification Number (EIN).

You will want to keep all of this in mind as you determine your business’ credit card policy and make decisions such as whether other employees will have company credit cards.

You should only use the card for business expenses

You have probably already been warned against “commingling” funds, which means you should keep your business finances and personal finances separate. This is true within your credit card accounts too. Most business credit cardholder agreements stipulate that they are “for commercial purposes only” (or they use very similar language to that effect). This means that when you open the card, you are promising not to use it for personal expenses. Now, a creditor will not nitpick every single transaction on your card to ensure that each is a business expense. But, if you develop a pattern of using the business card for personal expenses, that would technically be a violation of your agreement and theoretically could lead to the creditor cancelling your account.

You can get a business credit score

Your credit card can contribute to your business credit score (yes, there is such a thing!). This can be very helpful as your business grows. A good business credit score will help you access future business credit, including loans, with good terms. Also, having a good business score will allow for further separation between your business and personal credit.

While you can get business credit as a sole proprietor, and without an EIN, you may want to consider other options. Business types other than sole proprietorships are required to take additional steps that can be helpful in building business credit. That does not mean you should necessarily choose a different entity type; after all there are many successful sole proprietorships. But, this is something to keep in mind, particularly as your business expands and your need for business credit may increase.

Formalizing your business through proper registration with the state and incorporating it can help build your business credit by making it clear that you have an entity separate from yourself. Getting an EIN has a similar effect, and your business credit score will be tracked by your EIN. Many business types are required to have an EIN, but sole proprietors are not required to have one. A sole proprietor may apply for an EIN, though, and this could be helpful building a business credit profile.

Rewards are not taxable income but may affect your tax deductions

One of the biggest perks of a business card is that it can earn rewards. These can be used as discounts against your balance or on redemptions for other costs, like travel. The good news is that these rewards are not taxable income. However, they can affect how much you deduct as business expenses on your taxes.

Bankrate has a great summary about the implications of business credit card rewards. The most important point to remember is that if you use rewards for a business purchase, you cannot deduct the amount of the purchase that was paid for with rewards.

You should manage business credit like personal credit

Business credit is different than personal credit. And as we have discussed, you will want to keep the two separated at all times. Your business can scale and grow over time, and it might make sense to take risks with your business when opportunities arise. These are risks that you might not take with your personal finances. But, remember that you are liable at the end of the day.

So, the same rules of personal credit apply to your business credit. Your goal should be to manage it wisely. This means trying to pay off the balance in full every month to avoid interest charges. If used wisely, your business credit card can be a tool of convenience and it can earn you valuable rewards. Those features are much better than accruing interest. If you need to longer term financing, you will probably get better terms on a business loan.

Bottom Line

Business credit can be incredibly helpful for a business. The goal should be for your business to take advantage of the perks of having a credit card by using it wisely. If you do that, you will enjoy increased convenience, accrue rewards, and build your business credit score for future borrowing.

Keep these important concepts in mind as you move forward. The most important takeaway is that you are inevitably liable for the debt on your business credit card, so manage it carefully!

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