Building business credit is an essential step in the growth of your company. One way to do that is to open and properly manage a business credit card account. It’s important to use business credit cards responsibly so you can continue building up your business credit history and score, which can help you gain access to larger business loans, lines of credit, and credit card limits in the future.
Why is business credit important?
Your business has a credit score. It’s not connected to your personal FICO score. Business credit scores are issued by Equifax, Experian, and Dun & Bradstreet. They’re attached to your EIN number and are used by banks, credit card companies, and online lenders to determine the creditworthiness of your company. That’s important, particularly when you’re in growth mode.
Business credit can be used for hiring more staff, expanding operations to a new location, renovating your current space, buying additional inventory, replacing outdated equipment or technology, etc. For larger, long-term expenses, you might want to apply for a business line of credit. You may want to use a business credit card for day-to-day and short-term expenses.
How to use business credit cards responsibly
The recommended best practices for managing a business credit card are like those employed by personal credit card holders striving to improve their FICO score. With a business credit card, your goal is to build business credit. The numbers are bigger, but the principles are the same. Consider the following a “must do” list for managing your account.
Pay off your balance every month
Available credit is a variable used in calculating a business credit score. Credit card interest payments are an expense that limits your available cash flow. Pay off the full balance every month to avoid interest and you’ll also improve your business credit score.
Spend less than 30% of your limit
Try to keep your spending under 30% of your total credit card limit. One way to do this is to make an extra payment mid-month. Another way is to pay with cash when your credit usage starts to get high. Maintaining a good business credit score is important for your long-term company goals.
Choose a card with rewards and low fees
Business credit card rewards programs can provide you travel perks like discounted hotels, airfare, and rental cars. Some cards give you cash back on your purchases. Both incentives save your company money, so take advantage of rewards when you can.
Use your card only for what you can afford
Don’t spend money based on projected future revenue. If you don’t have the cash on hand to cover a credit card purchase, don’t make the purchase. Consumers often “max out” their credit cards and need to seek relief, but that’s especially not advisable for businesses.
Take advantage of 0% APR offers
Finding a credit card with a 0% APR is like discovering buried treasure. They’re less common in the current economic environment because interest rates are so high, but there still may be some 0% introductory APR offers out there.
Business credit card mistakes to avoid
The previous suggestions were a “must do” list. The ten suggestions below are your “must not do” list. You’ll need to avoid these behaviors if you want to benefit and make the most of your business credit card. Be sure you know how to use business credit cards responsibly before you open an account.
1. Mixing personal and business expenses
This is a common mistake that many sole proprietors make with their business credit card. Using it for personal meals or to buy household items could cause all your business tax deductions for purchases made with that card to be disallowed.
2. Carrying a large balance from month to month
Credit card companies charge interest on unpaid balances. If you carry a large balance from month to month, your interest payments will also be sizable. Best practices suggest that you pay the entire balance off each month to avoid interest payments entirely—and that involves spending within your means.
3. Choosing the wrong type of card
Your business credit card should be a match for your business. You could choose a cashback credit card, a travel rewards card, or a card with a 0% introductory APR offer. Evaluate your needs and don’t avoid cards that have high annual fees. They might offer benefits that outweigh the annual fee, though you should consider the pros and cons.
4. Missing out on rewards
Earning rewards with your business credit card is one thing. You also need to redeem them so you’re taking full advantage of your card’s benefits. Some rewards can expire, so be sure to redeem your cash back, travel miles, or points to get the best value for your spending.
5. Sharing with employees without limits
Allowing employees spending privileges with no limits is a temptation that will trip up more than one of your most trusted people. Ideally, you’ll want to find a business credit card that allows you to set limits, monitor their spending, and restrict purchases to certain stores. This can also help you automate your expense reports.
6. Making payments late
Credit card companies have stricter guidelines on business credit cards than they do on personal credit cards. Missing a payment deadline can raise your interest rate, incur penalty fees, and damage your business credit score.
7. Waiting to report fraud
Any type of fraud should be reported immediately. If you see a pending charge that looks unfamiliar, call your credit card company. Even small charges add up over time. Monitor your purchases daily or have your finance department stay on top of regular expense reports.
8. Not using virtual credit cards
Just to clarify, not using virtual credit cards is a mistake. Virtual cards are an even more secure alternative to physical credit cards, which can be used for online purchases or employee expenses. They can be turned on and off in your admin panel, so fraud is unlikely to occur—plus, virtual card numbers are randomly generated to protect your actual account number.
9. Closing a card too soon
Closing a credit card account too soon can negatively affect your business credit score. Closed accounts decrease your total credit limit, which increases your credit utilization ratio. If the closed credit card is an older account, you could also decrease the average age of your business credit. Before closing a credit card account, consider how it may impact your business credit and why you want to close it in the first place.
10. Applying for multiple credit cards at once
Each application you submit for a business credit card will generate a hard inquiry on your company credit history that will lower your company credit score temporarily. Submitting too many applications at once could cause significant damage and signal a red flag to credit issuers. Shop around for the right card and once you’ve found the best fit, submit one application.