Many business owners agree that a small business credit card can serve as a valuable financial tool for their corporation. Having access to a revolving line of credit is one reason why small business credit cards appeal to owners of small or start-up businesses. Similar to traditional unsecured credit cards, a small business credit card will charge interest on unpaid balances which makes finding a card with an attractive, low interest rate important. The following factors should be taken into consideration before applying for a small business credit card.
Benefits of Small Business Credit Cards
- Both consumers and business owners can take advantage of online tools and year end account summaries which track and categorize expenses. This feature makes bookkeeping easier while helping document business expenditures at tax time.
- When used responsibly credit cards increase the account holders purchasing power. This comes in handy when you deal with vendors online or via telephone as well as point of sale transactions. Having a financial reserve to help pay expenses when money is tight can make the difference between a small business succeeding or going under. Consumers are encouraged to not use credit as an extension of income and the same could be true for businesses. There are circumstances however that occur in business that increases the need to have a financial cushion such as outstanding accounts receiveables or a slow period.
- If your credit card is lost, stolen or otherwise compromised you are protected as long as report your concerns immediately. Most credit card issuers have a fraud department that monitors your purchases. This can save you thousands of dollars if they spot unusual activity or fraud that may have otherwise gone undetected until you reviewed your statement. In addition to this built-in security, business credit cards can be used by authorized employees which eliminates the need to carry cash or issue reimbursements.
Drawbacks of Small Business Credit Cards
- Unlike a traditional loan or fixed line of credit, the interest rates on your small business credit card will vary. There was a time not too long ago when accounts that were managed responsibly were rewarded with lower interest rates. The current credit crunch has increased the occurrence of credit card issuers raising interest rates at any time for any reason. This may prove troublesome for businesses that carry a higher balance each month.
- Security is both a pro and a con for business credit cards. While issuing a company card to an employee for business use is easier than using checks, cash or reimbursements the risk of unauthorized use increases as well. For this reason it is important to establish company rules regarding the use of company credit and a system which closely monitors activity on the account.
- It would be ideal if business owners could separate their business finances from their personal finances. This is simply not the case when you start your own business. As with other forms of financing, credit cards will likely require a personal guarantor who is willing to accept responsibility for the account should the business fail to repay the financial obligation. In most cases the business owner agrees to accept this legal liability which could result in damage to his/her personal credit in the event the business is unable to meet the terms of the contract.
Business owners can include small business credit cards as a resource or tool for their financial needs. As with other lending options, the benefits should be carefully weighed against the potential negative financial impact on the company.