There are plenty of ways small businesses can access funds, from overdraft facilities to bank loans to lines of credit and, of course, the business credit card.
But is a business credit card right for your company?
This article is designed to help you answer that question so you can decide whether to proceed with that application or find a different way to fund business purchases.
We’ll explain what business credit cards are and what they’re for, what kinds exist, how businesses benefit from them, and more.
What is a business credit card?
A business credit card works just like a personal credit card.
Your bank gives you a card with a specified credit limit. That limit is essentially available to you as a short-term loan for use whenever you need it.
In exchange for using the bank’s money, they charge you interest.
You’ll have a certain number of days to pay back the money used before interest starts being charged. There are also other fees involved, such as cash advance rates and late payment fees. We’ll explore that in more detail later.
What can a business credit card be used for?
Business credit cards have a few different purposes, but their main one is to make business spending easier.
If you’re buying a new software platform on a subscription, for example, you’ll probably need to use a credit card (some providers accept bank transfers, but it’s rare).
As a secondary purpose, business cards can be used as a source of additional funds above and beyond what you have available in the bank account, giving you another option for managing cash flow.
How do businesses benefit from credit cards?
Credit cards come with both upsides and downsides. Let’s start with the upsides:
Cash flow management
Having a business credit card extends your ability to purchase the goods and services your business needs to operate effectively.
If you’ve got $4,000 in the bank but you need to buy $9,000 worth of inventory, say, then a $5,000 credit limit can help you make that purchase. Without it, you’d have to wait for a customer payment to clear, which can impact supply chains and business productivity.
Rewards programs
Like personal credit cards, many business cards offer rewards programs, such as cash back on purchases or travel rewards.
If you’re diligent in paying off your card before interest charges become active, using a business credit card as your main purchasing method can be a profitable exercise.
Expense tracking capabilities
Some of today’s most forward-thinking business credit cards are more than just a line of credit; they’re tied into an expense management platform and provide access to deep reporting, forecasting, and even AI-powered insights to fuel better decision-making.
What kinds of business credit cards exist?
Not all business credit cards are made alike. Some are designed to keep costs low; others are optimized for rewards.
While each credit card comes with its own terms, conditions, interest rates, and rewards programs, we can broadly categorize business cards into five categories.
1. Cash back cards
Cash back cards are just as they sound:
They give you cash back on every purchase. For example, you might earn 1% cash back on all business purchases.
Every card has different rules here.
Some give cash back rewards annually, while others dish them out quarterly. Many also provide additional cash back rewards from certain suppliers to incentivize purchases.
2. Travel rewards cards
Travel rewards cards are like cash back cards, except instead of earning cash for every purchase, you stack up points with a travel agency or airline, which you can then cash in for flights, accommodation, or other business travel services.
3. Low-rate business cards
Business credit cards always come with fees and charges. It’s built into the model.
You receive benefits like cash back or travel rewards, which the financial institution funds with the fees it charges, such as annual card fees and interest on purchases.
But you can reduce those fees by looking for a low-rate business card.
These tend to have lower interest rates on purchases and low or no card fees. Some of them even have 0% balance transfer offers, where you can bring your balance over from another card and benefit from a few months of no interest.
The downside here is that low-rate business cards typically don’t offer any rewards.
4. Secured business credit cards
Most credit cards are unsecured, meaning there is no underlying asset attached to the debt that the financial institution can repossess if you don’t repay.
That’s part of why credit card interest rates are so high—the bank is taking on more risk, and risk comes at a price.
Businesses can opt to reduce their interest charges by looking for a secured business credit card.
With a secured credit card, you’ll put up a business asset (such as machinery or company cars) as the collateral for the credit card, which the bank will have some recourse to repossess or claim should you fail to meet repayment obligations.
5. Store-specific credit cards
A store-specific credit card is one that is issued by a common business supplier, such as a fuel station or office supplies company.
They’ll generally use a financial institution to provide the actual credit, and you can use the card to make general purchases from all suppliers.
The benefit here is that you can earn special rewards or discounts by using that card to shop with the supplier who has issued it.
For example, if you have a business credit card with Shell, you’d earn extra reward points every time you fill up your company car at one of their stations using their store card.
What does the application process for a business credit card involve?
While the exact application process your bank or financial institution will take you through will differ based on factors like their security preferences, your banking history, and company age and stage, these are the broad steps you can expect:
- You complete and submit an application form.
- Your eligibility is assessed to determine whether you meet requirements like meeting minimum revenue or local registration needs.
- The bank asks for any additional information, such as collecting personal and business details, tax ID numbers, financial information, and relevant statements.
- A credit score review is completed (for the business, but for small business credit cards, banks typically run personal credit score reviews).
- The bank requests any additional documentation required.
- You receive a decision (approved or denied).
- The card is sent, and you’ll typically need to activate it before you can use it to make business purchases.
Business credit card rates and fees
When choosing between different credit card offers, there are three things you want to be aware of:
- Interest rates
- Reward programs
- Fees
Interest rates for business credit cards typically average around 22%. That’s a lot higher than other forms of financing, such as bank loans and overdraft facilities, which come in at around 7% at the low end.
For that reason, credit cards are typically for short-term financing needs rather than long-term solutions.
The flip side of this is that many credit cards come with rewards programs, which typically give you between 1-5% cash back on purchased, or the equivalent in travel rewards.
Finally, you’ve got fees, such as:
- Application fees
- Annual account fees
- Card fees
- Late payment fees
When considering applying for a credit card as a form of business financing, it’s important to understand and weigh up all of these potential charges.
Business credit card risks and credit score impact
Business credit cards are not risk-free.
Like any form of business financing, using a credit card can have consequences for your credit score as well as your company’s current and future borrowing capacity.
Depending on how you manage and use your card, these impacts can be either positive or negative.
Positive impacts of credit card use on credit scores
Regular on-time payments have a positive impact on your credit score, as can keeping your credit utilization ratio (the amount of credit used vs. your limit) low.
In short, using credit cards, as long as you do so responsibly, can improve and enhance your credit score.
Negative impacts of credit card use on credit scores
Where things start to get a little ugly is when you don’t manage cash flow effectively, resulting in late or missed payments. These can really hurt your credit score.
Other ways your credit score can be negatively impacted include:
- High credit utilization (when you’re consistently using the card close to its limit)
- Frequent applications, which can temporarily lower your score
- Failing to pay your credit card altogether
Positive impacts of credit card use on borrowing capacity
Using credit cards for business purchases can also help improve your ability to borrow in the future.
This mostly comes as a result of an enhanced credit profile. If you use your credit card responsibly, your credit score can improve, which will allow you to borrow and/or at lower rates in the future.
Additionally, responsible credit card use often leads to the ability to increase your limit on that same card, further extending your borrowing capacity.
Negative impacts of credit card use on borrowing capacity
If, however, you don’t use your credit card so wisely, you may suffer some negative ramifications in the form of reduced borrowing capacity.
Carrying too much debt on your card (i.e., not paying it off) is not seen positively by potential lenders, who will view it as a risk factor.
The same goes for poor credit scores. If you fail to make payments or consistently keep a high credit utilization ratio, your credit score might drop, meaning lenders will allow you to borrow less.
Finally, many lenders consider something called your debt-to-income ratio (DTI) when assessing credit applications. Basically, it's a weigh-up of how much your company owes vs how much it earns.
Businesses with higher DTIs are less attractive borrowers and receive less favorable terms (like higher interests and smaller loan approvals).
Business credit cards for any business
Business credit cards can be an effective tool for managing cash flow and can even improve your ability to borrow in the future through positive contributions to your company credit score.
While you can use a regular credit card for business expenses, specialized designed financial offers like the BILL Divvy Card powered by Visa* offer attractive business-centric features like:
- Access to virtual cards
- Expense management and forecasting
- Spend control functionality
Find out whether the BILL Divvy Card is right for you.
*The BILL Divvy Card is issued by Cross River Bank, member FDIC, and is not a deposit product.
