More than half of all small business owners in the U.S. use credit cards. But when getting a business off the ground, twice as many business owners use personal credit cards (13%) than they do business credit cards (7%).
While it’s possible to use a personal card for your small business purchases, doing so may lead to difficulty in separating personal and business expenses at tax time, or lending your employee a card with which to make business purchases.
So you may be wondering whether to apply for a general business credit card, a card affiliated with a business you often use for travel, such as Marriott, Delta, or United, or a retailer you often make business purchases from like Amazon or maybe Costco.
First, consider the significant differences between a business credit card and personal credit card.
Business Credit Cards and Purchasing Power
Even the smallest of businesses may need to spend and borrow much more than a typical consumer, so their cards should be able to accommodate these spending patterns and the changing cash flow.
However, the federal Credit Card Accountability Responsibility and Disclosure (CARD) Act restricts how much credit a consumer card issuer can offer to those with limited income or means.
Business credit cards don’t fall under this act, so issuers are free to extend higher limits. Credit limits can range from a few thousand dollars to $100,000 or more. You might also have business-friendly financing features such as purchasing power beyond your card’s credit limit, deferred payments, or no preset spending limits.
You can always request a higher limit later on, after demonstrating responsible card use.
Business credit cards are tailored to small business owners’ needs. Some of the features you may see include:
- Year-end summaries to simplify business-related tax expenses
- Employee cards at no additional cost, with an ability to set spending caps or purchase category alerts
- The ability to delegate management of credit cards to employees or accountants
- Business travel perks, such as free checked bags, priority boarding, TSA Precheck, and Global Entry fee reimbursement
- Cash back or bonus miles in business categories like purchases made at office supply stores, internet, and phone service
- The ability to earn extra loyalty points beyond those of personal cards, for lower annual card fees
- Up to 2% cash back on business purchases up to high amounts, such as $50,000
- Apps that store receipts for up to seven years (for tax deduction purposes)
- Vendor payment services (for a fee)
Business cards may dangle higher cash back or rewards welcome offers, as well. The spending requirements may also be higher, but could be easier for a business to achieve due to expensive routine purchases or equipment, such as laptops. For example, a sign-up bonus could be earning $500 cash back after spending $4,500 on the card in the first three months from account opening.
While various personal credit cards may offer some of these small business-friendly features, it could be difficult to find all in one card.
Don’t forget to compare annual fees when comparing benefits, and don’t run up expenses in pursuit of more points. Paying interest could erase the business card’s benefits.
Business Cards May Help Protect Personal Credit
If the balance on any one of your personal credit cards is high in comparison to the credit limit, your personal credit scores could suffer due to high credit utilization. Using a personal credit card for charging large amounts for small business inventory or supplies can directly impact your personal credit score.
By using a business credit card, you may be able to avoid that potential hit to your personal credit score because it doesn't report activity to credit bureaus monitoring personal credit.
However, many card issuers do check your personal credit before issuing a card, and will report defaults and late payments. That’s because some small business credit card issuers don't report owner activity to the personal credit bureaus unless the account is paid late and goes into default. With one of these cards, as long as you pay on time, your personal credit will be unaffected.
To apply for a business credit card, you might be asked for basic personal information along with business information such as your total annual revenue and business tax ID or employer ID number.
Business credit cards offer a solid strategy for building a business credit profile with commercial credit agencies. A business credit card paid on time, over time, can help boost business credit scores.
All major small business credit card issuers report payment history to at least one of the major commercial credit agencies, like Equifax Small Business, Experian Business, or Dun & Bradstreet, or to the Small Business Financial Exchange (SBFE) which provides that data to other business credit reporting agencies.
A personal credit card, however, will not help you build a business credit history, even if you use the card to pay for business expenses.
Fewer Legal Protections
For personal credit cards, the Credit CARD Act offers additional protections for cardholders, including no rate increases on most existing balances, a cap on penalty fees, and a 45-day notice before rates are raised.
But this law does not apply to business credit cards. Most notably, many card issuers can raise the credit card’s interest rate at any time, including if the bill is paid late by even just a day, and apply that new rate to existing balances. The new rate may be much higher than the original APR, making it harder to repay credit card debt.
Some business credit card issuers do offer their own protections, though, so be sure to read the card agreement before signing up.
Compare the terms and conditions of a potential business card to the terms and conditions of a personal card you already own or are familiar with, and note the differences.
The Bottom Line
These are just a handful of the differences to consider when choosing between a personal and business credit card for your small business expenses. Since cards offer very different terms and conditions, your choice will be personal—even if your next credit card isn’t.