By Odysseas Papadimitriou of CardHub.com, a website focused on helping consumers get the best credit card deals.
Have you ever stopped to consider why small business owners use business credit cards? I mean, you’d think a business credit card would be the obvious choice for business spending, but are mere naming conventions enough to go on? Perhaps this label is a relic of the past. Maybe it’s based upon myths. Either way, I think there’s enough reasonable doubt to warrant a little investigation.
As it turns out, the business credit card path isn’t always the way to go. Why? Well, for starters and contrary to popular belief, creditors hold small business owners personally liable whether they’re using business credit cards or general-use/personal credit cards because a small business owner’s personal finances are typically intricately intertwined with that of his or her business. In addition, small businesses do not have enough autonomous capital to warrant limited liability. As a result, creditors come after both you and your business upon delinquency or default, making it important to disregard labels when selecting a credit card for your small business.
You should instead focus on the specific utilities different cards bring to the table and consider how they apply to your spending needs. Chances are you’ll have two types of business expenses: everyday purchases that you will be able to pay for in full each month and more significant expenditures resulting in a monthly balance. Therefore, you will have two main concerns in choosing a credit card for your business: maximizing the benefits of your everyday spending and minimizing the cost and risk associated with your debt. Interestingly, these needs are now best served by two different types of credit cards.
The Credit CARD Act of 2009 made it illegal for credit card companies to apply an increased interest rate to an existing balance held on a personal credit card unless the account holder becomes 60 or more days delinquent. Since business credit cards currently do not enjoy the same protections, opening a personal credit card to use for any purchase that will result in a balance at the end of the month is a must. While you might feel uncomfortable bucking naming conventions, a personal credit card will provide debt stability, protecting you from the whims of credit card companies that often raise interest rates unexpectedly and without cause.
Still, a traditional business credit card should be used as well. Not only will such a card help you efficiently track and manage business expenses, it will also allow you to give your employees cards with customizable limits and earn rewards on their spending.
Ultimately, as the current credit card landscape necessitates using two credit cards for small business spending, you now know where to start your search. However, in comparing credit card options and gauging which to apply for, you must be careful not to fall into another common myth befalling small business owners: overestimating the importance of their business’s credit standing in the credit card application process. Since you are personally liable for all credit card use, your personal credit standing carries far more weight than that of your business. Therefore, instead of searching for credit cards for new businesses, apply for the best credit card your credit score will allow. Be careful not to apply en masse though because each time you apply for a credit card, your credit score dips slightly for about six months. So keep likelihood of approval in mind when applying for your business’s spending vehicles, and bring a strategic spending arsenal to your business’s disposal.
This guest article was prepared for WorkAtHomeTruth by Odysseas Papadimitriou, CEO of CardHub.com. Odysseas Papadimitriou has expertise in consumer lending that extends from marketing strategy, to credit risk management and underwriting. He writes for CardHub’s Wallet Blog, and contributes to other leading publications, including Forbes.com, TheStreet.com, The Huffington Post, Fox Business, and U.S. News & World Report.