Even though I’ve worked for myself for years, I’ve never gotten a small business credit card. I don’t have a lot of business expenses as a freelance writer, so I’ve never applied for one. But if you frequently purchase supplies and equipment for your company, it may make sense for you to get a business rewards card.
Here’s an overview of the pros and cons of small business credit cards to help you decide if they’re a good financial move.
Pros of Small Business Credit Cards
Separate Personal and Business Finances
A major benefit of getting a small business credit card is that it separates your personal and business finances. Using your personal credit card for company spending makes it harder to track which charges were business expenses. This can make filing your taxes and calculating your deductions a big headache.
Getting a separate business credit card that you only use to buy equipment and supplies for your company solves this problem and makes accounting easier.
Earn Rewards on Business Expenses
Another perk of small business credit cards is that they allow you to earn rewards on your purchases. Credit issuers usually offer better rewards packages to businesses than consumers. So you may earn more miles or cash back by charging your business expenses to a business credit card rather than your personal card.
However, it’s important to make sure you choose the right credit card for you based on your spending patterns. Most business credit cards offer higher rewards rates on certain types of purchases like office supplies or travel. So try to choose a card that will give you extra rewards in categories that you spend a lot of money on.
Cover Cash Flow Gaps
Every business runs into cash flow gaps. Maybe a client took a long time to pay you or an unexpected expense popped up. During these times when money is tight, it can be helpful to have a small business credit card to tide you over. You can use it to cover the shortfall until you get back in the black.
Cons of Small Business Credit Cards
Temptation to Overspend
Although business credit cards are great for covering small cash flow gaps, you shouldn’t treat them like a blank check. Spending more money than you can reasonably pay off can get you into a debt cycle that’s difficult to escape.
Interest rates tend to be higher for business credit cards than personal ones, which makes it harder to pay off any debt you rack up. So you should try to avoid carrying a balance if possible.
One potential drawback of small business credit cards is that they require you to sign a personal guarantee. Signing a personal guarantee makes you financially responsible for your company’s debt. Even if your business goes under in the future, you’ll still have to settle the company’s credit card bill out of your personal funds.
Personal guarantees supersede the liability protection offered by LLCs. So even if you’ve structured your company to limit your personal liability, you’ll still be on the hook for your company’s debt.
However, if your business has good credit and substantial revenue, you may be able to qualify for a corporate card. Credit card issuers don’t usually make you sign a personal guarantee to get a corporate card. But you’ll need a lot of cash in the bank (sometimes north of $100,000) to qualify. So if you run a startup or small business, corporate cards probably aren’t a viable option.
To use some small business credit cards, you’ll have to pay an annual fee. Usually the rewards you earn will outweigh the cost of the annual fee. But before you apply for a card, it’s a good idea to calculate the amount of cash back you expect to receive based on your spending. That way you’ll know for sure that the card is worth the fee.
If you don’t want to pay annual fees, there are cards that don’t have them. However, no-fee credit cards usually have fewer perks and lower rewards rates.
Should You Get a Business Credit Card?
Small business credit cards are great for entrepreneurs who want to separate their personal finances from their company. They also offer the chance to earn rewards, which is ideal if you buy a lot of supplies and inventory for your company.
But if you don’t think you can resist the temptation to overspend, it may be better to pay for your expenses with your debit card. Since you’ll be personally responsible for your company’s debt, you don’t want to rack up a big credit card bill your business can’t pay.
If you don’t have a lot of expenses like me, you may also decide that getting a business credit card isn’t worth it.
Do you have a small business credit card for your company, or are you planning on getting one? Let me know in the comments section below!