Credit cards are one of the first, and easiest ways, many small business owners access credit—they can also be one of the most expensive. Put out your shingle or otherwise list your business and before long you’ll have more credit card offers in the mailbox than you can shake a stick at.
This isn’t necessarily a good thing.
Although we’ve all heard stories about entrepreneurs that successfully financed their businesses with credit cards, there are just as many (maybe even more) who failed because of the practice. Credit cards generally can be an expensive source of capital, but what the average business owner doesn’t know about business credit cards could hurt him or her.
Don’t get me wrong, I believe credit cards can be a valuable resource for small business owners who are thoughtful in how they approach credit. Nevertheless, there are a few things you should know about business credit cards and how they differ from the credit card you might already have in your wallet.
First, let’s talk about some of the benefits:
- Business credit cards make it easier to keep track of employee expenditures and can serve as an audit trail.
- Business credit cards often offer higher spending limits than consumer credit cards.
- Business credit cards, like consumer cards, offer incentives—they are just geared toward the business
- Some business credit cards offer terms specifically designed for businesses—for example, the American Express Plum card will give you 60 days to pay your balance with no interest
There are other differences though, which are not as attractive. The CARD Act of 2009 which protects consumers against predatory credit card practices doesn’t apply to business credit cards. Some of the differences you need to be aware of include:
- You aren’t protected from arbitrary-feeling/surprise rate increases. Not only can business card lenders raise the interest rate at any time they want, they can also apply the new rate to older charges—something they can’t do with a consume credit card. That being said, there are business credit cards that offer the same protections afforded to consumers with the CARD Act to business customers, so it’s important to make sure you understand all the terms before you accept any of the myriads of credit card offers you receive in the mail.
- Don’t expect a consistent billing cycle. The CARD Act requires consumers get their statement at least 21 days before the payment is due. Not so with business cards. What’s more, the payment date doesn’t need to fall on the same day of the month either. You really need to pay attention to when the payment is due the day the statement arrives. Earlier in my entrepreneurial career, I learned this the hard way.
- There are NO caps on late fees. Consumers all share a cap of $25 or the minimum payment, but business card holders can be charged a lot more. There isn’t a limit on over-limit fees either. In fact, the over-limit fees can cost more than the charges themselves.
When an offer comes in the mail, it will include a list of disclaimers in what is called the fly-type, or small print. It’s called fly-type because it’s so small only a fly can read it. It’s written in such a way as to be difficult to read and understood, but you need to read it and understand it. What’s more, if you don’t, you should be able to call the card provider and get someone who can explain it to you. If they won’t, I think it’s safe to assume that it’s not a good deal for you and you should pass.
In many cases the advantages of using a business credit card can outweigh the challenges provided you are careful and aware of the differences. For early-stage businesses, the wise use of a credit card might even be the best way to establish credit for your fledgling company.
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