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Business Credit Cards Demystified

If you own a business or are in the process of starting one you should consider the merits of obtaining a business credit card.

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Running a business is no child’s play; however you do need to nurture it like a child to watch it grow. One of the primary needs of a business that fuels its growth is a sound credit system. All businesses run up credit, and at the same time extend credit, both of which help the business run smoothly.

There are various business credit cards available in the market and institutions and banks lend you business credit in a variety of ways.

Business credit cards are of the following basic types:

Business credit cards with personal liability
Here you are personally liable if your business does badly and would need to pay off any credit that you may have run up on the business front. Failure to discharge this responsibility would affect your personal credit score too.
Business credit cards without personal liability. Here you are not held responsible if the business goes bust. Your personal credit score will not be affected in any way.
Secured business credit cards
You can obtain these cards against some collateral – some form of asset that you pledge, against which you are issued the card. In case you do not clear your business dues in time you could stand to lose the asset, which your lenders may confiscate to recover dues.
Unsecured business credit cards
Here you are given the business credit card without the need to provide any asset as security
Prepaid Business Credit Cards
These are similar to your personal debit cards, only difference is that they are used for your business needs

While this is a very basic classification, do understand that small businesses have cards that are different from those provided to corporations.

The ideal form of credit for any business is unsecured credit without personal liability. This is the type of business credit card that you should be looking out for.

However, it is one thing to want an unsecured business credit card without personal liability and quite another to get it.

If you are a start up, it is next to impossible to get unsecured loans without personal liability. There are some companies who do give this kind of credit to startups but it is very difficult especially in these times.

Let us assume for the sake of this discussion that you have your own business but are using your personal credit card to meet your business needs, which basically means that you haven’t found the need, or thought of getting a business credit card.

If you are happy with your current process of using personal credit for your business needs then why am I urging you to do a rethink? Here’s why.

Business credit cards offer you a variety of benefits that a personal credit card does not. The advantages include:

  • A larger credit facility,
  • Lower interest rates,
  • Greater reward programs
  • Additional cards that you could give your employees which help them eliminate the need for petty cash. Of course, you would put a limit on these cards to prevent any kind of misuse.
  • Cash back offers
  • Other benefits include the freedom to carry a large sum of cash for your business related spending. You are also able to get tax write offs on all the purchases that you make from your business credit card.
  • One of the most helpful aspects of having a business credit card other than the low interest rates is the fact that it helps you keep organized. You are able to view all details about your spending, online; and it is a great way to keep track of business related spending both by your employees and by you. Furthermore the yearly detailed summary of the business credit card purchases helps during accounting, as segregation of personal expenses from your business ones is already done.
  • A business credit card is also useful when you have some large expenses to take care off and do not have the funds to do so at the time. As the needs of your business grow your dependency on getting timely funding also grow. Business credit cards help you buy what you need immediately as the credit limit extended is greater.
  • Business credit cards help provide bridge financing in case of delay or default from your debtors.

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How do you go about getting a business credit card?
The best place for a first timer is the local bank where you may already be having a personal account. You will get a business credit card with personal liability very easily and you may not even have to provide security, if your standing with the bank is good and your personal deposits are high.

Should you get a business credit card immediately even if you do not have any immediate concern about obtaining credit?
The answer to this question is - please do! The earlier you get your business credit card, the better. It doesn’t matter if you don’t need a penny of credit for the moment; you will need credit as your business grows. The reason you need to get the card now is so you can establish a credit cycle where you display your credit worthiness. Once this is established you will find it easier to get greater finance when you need, as the trust is already established. So get that business credit card pronto and make some purchases with it even if you don’t need the credit. Pay back your dues much earlier than your due date. Also keep your purchases well below your credit limit. You need to establish your credit worthiness not only with your local bank, but you also need to build business credit. What this means is that you need to build a business credit reputation that stands alone from your personal credit reputation. I will talk about this in greater detail a little later.

If my employee misuses the employee credit card – will I be held responsible – will my personal credit rating get affected?
As long as the card has been issued to you with a personal liability clause you are responsible. That is why choose with care the employees with whom you entrust cards. Also keep a spending limit on your employee cards, which you can set at the time of obtaining the business credit card.

Do’s and don’ts

Be responsible: Just because you have greater spending limit is no reason to get carried away making purchases. The foundations of a good business lie in keeping your head strongly fixed to your shoulders.

Limit the number of cards that you get at a time. Don’t get too many cards. The greater the number of business credit cards, the greater the chance that you may miss out on a payment, which would in turn harm your business credit.

Keep track. Monitor your business expenses online regularly. An erroneous charge to your account could risk you running bad credit. See that what the account reflects is accurate. If you do find an error, notify the credit card company immediately so that corrective measures are taken in time.

Optimise your usage such that you gain maximum rewards. If you play it smart you can stand to make considerable savings by maximum utilization of the reward programs that are on offer.

Respect the grace period. A 21 day grace period is what is normally on offer. See that you make your payments well in time for two reasons. One is that you avoid interest and two is – it helps you in building business credit.
Charge your card instead of taking cash advances Always charge your card for purchases and avoid taking cash advances against your business credit card as such advances do not have a grace period, and you start incurring interest immediately.
Let us now talk about how you go about getting a business credit card without personal liability, and what is business credit?

Getting a business credit card without personal liability is a business in itself. So pay attention.

In the initial years of your business your credit needs are low but when you want to expand or diversify you will find your needs increase manifold. At that time your business credit is what will come into play. Since you need to plan for your future needs from now, you would be wise to start building your business credit score even while you go about establishing your business.

So what is business credit? Business credit is similar to personal credit but is applicable only to the business in question. It does not reflect the financial status or credit situation of the person running the business at all. In other words business credit is what indicates your business health whereas personal credit is what determines your personal financial health.

Your FICO score is a reflection of your personal credit rating. Similarly your business credit also carries a score. The most common rating score for a business is Paydex. Another common business credit rating score is Intelliscore. Another rating is the DUNS rating.

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While a FICO of 680 or above is considered good for personal credit, business credit score needs a minimum Paydex score of 80.

Who gives you the business scores? There are companies that specialize in giving business credit ratings. You need to be registered with at least three of them and get three sets of scores before you can apply for a business credit card without personal liability.
The information regarding the corporate credit is gathered by business credit bureaus like Dun & Bradstreet, Experian Business, Equifax Business, and Business Credit USA. Your business credit reports are provided by these credit rating agencies
Here are the steps involved in getting a business credit card without the personal liability clause. Use these as a guideline.

  • Give your business an identity of its own. Register your business so that it is viewed separate from you. Do this as soon as possible, preferably right when you start your business. Understand that a sole proprietorship is considered part of the individual and not a separate identity. Here the business profits and losses are included on the individual’s personal tax return, and the individual retains personal liability for business debts and lawsuits. On the other hand LLC’s or Corporations are treated as separate from the individual running the business. Hence the credit extended to them is not dependent on the owner’s personal credit history but on the business credit history. Small businesses are usually registered as LLC (Limited Liability Company) or you can also go about registering your business as a Corporation. A registered business in the form of an LLC or a Corporation is treated differently when you look for business credit than a sole proprietorship. You must also be aware that Corporate credit cards carry greater credit limits and better reward programs compared to those offered to LLC’s.
  • Register with at least three business credit rating agencies.
  • Link up with vendors who do not need to see any credit rating and will provide you small amounts of credit. Pay these vendors way ahead of time. Get them to report your credit worthiness to the rating agencies. Since the rating agencies do not go actively collecting business credit information, it is very important that this information be provided to them, as the way this works is on a voluntary basis. It is important that the vendors you deal with actively provide your credit history information to the rating agencies.
  • See that you have all your licenses and permits in place regarding your business.
  • A separate business phone listing in the yellow pages is a must
  • A physical address of business is a must. If you operate from home then obtain a business mailbox from a company that offers a physical mailing address rather than just a P.O. Box
  • Try and have some amount of web presence at least.
  • When looking for expansion, have a rock solid business plan.
  • Know the very innards of your industry. Be prepared for any questions regarding the viability of your proposal
  • Show previous favourable credit history. Now you understand why I asked you to get a business credit card immediately even if you did not need it for the time being. The purpose was to establish a history of good credit behaviour. Two years of credit history with a business credit card with personal liability clause attached, should be sufficient for you to establish a good payment history. You may then start asking for removal of the personal liability clause.
  • If your business credit ratings are good then you should not have a problem in separating liability from your person to your business.
  • Though the criteria used to sanction you credit vary from company to company it is sensible to wait till you are certain that you have established a good business credit. Don’t rush into applying for a business credit card without personal liability clause as the rules of the game are stricter. Some of the criteria that lenders use to evaluate your application are
    • Your payment history with them if you have borrowed from them before.
    • Reports received from credit bureaus.
    • Business profile
    • Years in Business
    • Business tax returns
    • Employee details
    • Business plan
    • References
  • If your application is denied for some reason then there are some rules about reapplication. You may have to wait for some time before you can apply again. Haste in reapplication may lead to disqualification from getting credit.
  • An important thing to remember is to regularly check your credit report. Credit Bureaus update daily and you need to check that there is no mistake in the information provided to the rating agency or some error on their part, for it can lead to damaging your business credit through no fault of yours.

Nurturing your dream takes blood, sweat, and tears. With some smart moves you can start playing with the big fish and move from the pond to the sea. Obtaining a business credit card is the first step towards that goal.

Wishing you all the success.

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