Education Library · Financing Tools · Article 2
Almost every business owner has a business credit card, and most have several. They’re the easiest business credit to get, and they show up in nearly every company file we review. They’re also where a lot of quiet damage starts, usually because a card got used for something it was never built to do.
What a business credit card is
A business credit card is a revolving line of credit, usually unsecured. You get a limit, you spend against it, and as you pay it down the limit opens back up. If you pay the full statement balance every month, most cards charge no interest. If you carry a balance, the rate on most cards is far higher than a bank loan or line of credit.
Cards work well for fuel, materials runs and supply house purchases between paydays, recurring bills like software and phone service, travel and small one-off expenses. They also give you a clean record of business spending that your bookkeeper can work with.
What cards are a poor fit for
Anything that takes a long time to pay back. A truck, a large equipment purchase or payroll through a slow season will sit on a card for months at card rates, and the balance starts affecting the owner’s credit and the business’s borrowing picture in ways that usually don’t show up until a lender says no.
Here’s how it tends to happen. A plumbing company in its first year, doing about $440,000 in revenue, had a rough month and put around $15,000 of supply house bills on a business card to get through it. A few months later the balance was $22,000. The owner was paying $1,000 to $1,500 a month with no real plan to pay it off. Nothing about that first decision was reckless. A short-term gap got covered with a card, and the card turned it into long-term debt.
The personal guarantee
Nearly every small business credit card requires a personal guarantee. When you sign up, you agree to be personally responsible if the business doesn’t pay, even though the company’s name is on the card.
There are cards that don’t require one. These are usually corporate cards or charge cards that underwrite the business on its bank balance, revenue or commercial credit instead of the owner’s personal profile. They often require the business to keep a meaningful cash balance, and many have to be paid in full every month. They’re a real option, just not usually what owners get offered when they apply online.
Where the card reports
Business cards don’t all show up the same way. Depending on the issuer and the specific product, a card might report only to the business credit bureaus, to the owner’s personal credit as well, or to personal credit only if the account goes delinquent.
If a card reports to personal credit, a high balance raises the owner’s personal utilization and pulls the score down. That same first-year plumbing owner had another card in the business name that, in his words, “shows up under my credit for some reason.” The reason was the product he picked. As our founder Paul Childers tells owners, “Even their business credit cards, if it’s not done right, or if it’s done online and you pick the wrong one, it will report to your personal.”
Before you apply, look up how that specific card reports. Not the issuer in general, the specific product.
Business spending on personal cards
Some owners skip business cards and run company expenses through their personal cards. The business makes the payments, so it feels like it shouldn’t matter. Lenders see it differently.
A cabinet finishing company that’s been around for about 20 years had $30,000 to $35,000 of business spending spread across the owner’s personal cards. Her credit scores were 790 and 740. Her bank still turned down a car loan because her debt-to-income ratio came out at 59%. The bank wouldn’t count the business payments in her favor because the cards were in her name, so as far as the bank was concerned the debt was hers.
Utilization
Utilization is how much of your available credit you’re using. A $16,000 balance on a $20,000 limit is 80%. High utilization tells lenders the business may be leaning on credit to stay afloat, even when it isn’t.
Owners who run a lot of spending through cards for the rewards can create this problem without realizing it. They pay the balance off every month, but the statement closes when the balance is high and that’s the number that gets reported. Paying down before the statement closing date, not just by the due date, keeps the reported number lower.
There’s a balance to strike, though. Paul paid his own card down hard when it got close to $20,000, then three clients paid late at the same time and he went into a weekend with $1,200 in the business account. “I shouldn’t have paid my credit card down,” he said. “I could have let that sit longer.” Lower utilization helps your file, and cash in the bank keeps the business running. You need both.
Consumer protections mostly don’t apply
Personal credit cards are covered by the federal CARD Act, which limits when and how an issuer can raise the rate on an existing balance. Most business cards aren’t covered. Some issuers extend similar protections voluntarily, but they don’t have to, so read the terms and know what can change and how much notice you’ll get.
Opening more cards
Opening a new card every time a balance gets close to the limit is one of the patterns we see most. Each application can add an inquiry, each new account can lower the average age of the owner’s credit, and the total available credit starts to look like a stack of short-term debt waiting to happen. A few cards used well usually reads better to a lender than a lot of cards used to keep up.
This article is educational and isn’t legal, tax, accounting or lending advice. Program rules, lender terms and credit bureau practices change, so verify current terms before acting.
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