Robert Paisola: Western Capital's Business Credit Link Library 2007

What Entrepreneurs Should Know About Small Business Credit Cards

From Index Credit Cards Report:

The stories of entrepreneurs financing their business startups with credit cards are legendary. In fact, a Small Business Administration survey estimated that over 70 percent of small businesses use credit cards to finance their businesses, and the smaller the business, the more likely credit cards were or are used.

It's easy to see why. Bank loans, Small Business Administration loans, venture capital--all are complex and/or time consuming for entrepreneurs who just want to get going.

For most entrepreneurs, though, the credit card their business uses is whatever card is already in their wallet. For a variety of reasons, that's a mistake. A smarter choice for most entrepreneurs is one of the many small business credit cards available today. If you run a business, small business credit card issuers want you--and they're working harder than ever to make it worth your while. In fact, if you're not using a small business credit card, you could be leaving money on the table--and that's unacceptable to most cash-crunched entrepreneurs.

Think your business is too small to have a business credit card? Think again. Most small business card issuers think of their core customer as the owner of a company made up of ten people or less, and they recognize the great potential of the sole proprietor.

For a long time, most business owners turned to American Express, and with good reason. American Express has been offering business credit cards longer than anyone, and they've built up a well-deserved reputation for being the business owner's friend. But other major issuers have moved aggressively to get a share of this market, including Citibank, Chase and Bank of America. One company, Advanta, focuses solely on credit cards for small business owners.

"This segment is growing at a faster rate than consumer," says John Delaney, Senior Vice President, Chase Card Services. Delaney notes that, in the past, issuers often focused on the consumer and large corporate segments, but didn't necessarily recognize the special needs of the small business owner. The explosion of entrepreneurial activity in the last decade has made issuers take notice, and they've crafted offerings to serve the growing market.

For entrepreneurs, all this fussing over you means better deals, whether it's interest rates, rewards or business discounts.

O.K., great, they want you. But why should you want them? What advantages do small business credit cards offer the business owner? There are plenty:

Separation of Finances - Intermingling business and personal expenses on the same credit card could make for headaches when your credit card statement arrives, not to mention at tax time. Was that gas purchase or restaurant meal a business or personal expense? It may be hard to remember, and it creates an administrative nightmare if you're not using a credit card exclusively for your business.

Business Discounts - Perhaps the most attractive feature of small business credit cards is the business-focused discount offers that come with them. Discounts from major business suppliers are common, and they are discounts that few personal credit cards can match.

For example, American Express' OPEN Savings program offers 5% discounts at FedEx, AT&T, Hertz, Courtyard by Marriott, and more. The discounts are ongoing and automatically deducted on your credit card statement, so there are no hoops to jump through. Citibank has similar arrangements with Avis, Budget, Cingular Wireless, DHL and others. In addition, CitiBusiness cards now offer a free discount prescription drug card for its cardholders that can chop 10 to 60 percent off of the cost of prescription drugs. Small business owners can also extend this benefit to employees for just ten dollars per year.

According to Advanta Communications Director David Goodman, Advanta can even tailor cards specifically to certain small business types. Goodman used the example of credit cards tailored to dental practices--Advanta has an agreement with a major dental distributor to offer supplies at a discount rate when bought with an Advanta business credit card.

Introductory Offers - Uncertain cash flow is the bane of many a small business, especially in the early going. Taking advantage of a 0% introductory offer on a new small business credit card can give you a little breathing room while waiting for accounts receivable to outpace accounts payable. But beware--this is a cash flow strategy, not a strategy for funding a longshot business idea with no clear path to profitability. Only take advantage of zero interest offers if you are sure you'll be able to repay your balance when the introductory period is over. Citibank, Chase, and Advanta all offer business credit cards with no interest charges for the first year; other cards offer six-month interest-free periods.

Extra Cards for Employees (That YOU Control) - Small business credit cards almost invariably offer multiple cards under the same account, allowing you to obtain cards for employees who need spending privileges. Even better, most card companies allow you to control how much your employees can spend and even what types of purchases they can make. And you can usually do this all online, for maximum convenience.

Business Rewards - Yes, you can get rewards whether you use a small business credit card or not. But certain small business cards offer rewards tailored to your business interests, whether it be a focus on travel rewards, fuel rewards, office supplies, or simply cash back. For small businesses that know they will pay off the card's balance each month, rewards can be a direct source of cash, a free travel trip, or serve as gifts for employee recognition or as end-of-the-year bonuses. If your business spends heavily on its credit cards, you might consider paying a nominal fee (usually under $100) to get a card with greater rewards options. (American Express offers a number of cards that beef up the rewards when you choose a card with an annual fee.)

Higher Credit Limits - Many small business cards offer larger credit lines than you could obtain with a personal credit card. Also, being a small business credit card customer could serve as a gateway to larger loans if necessary. American Express, for example, offers extended credit lines for small business customers that generally do not require lengthy loan processing for approval.

There's a final aspect of business credit cards that could be viewed as either a positive or a negative, depending on how responsibly you use your card. For most business owners, getting approval for a new card is based on your personal credit history. (If your business has been around for a few years, your business credit history could be taken into account as well.) It follows then that the repayment of the card will also impact your personal credit history.

On the upside, if your business meets its credit card responsibilities, you can improve your personal credit score while also building toward a card based solely on the credit of the business. On the downside, failing to pay your small business credit card on time or going over the limit could impact your personal credit score, and that has ramifications for every loan or credit card you might pursue in the future, even if your business ceases to exist.