If you own a small business, credit cards can be a great source of cash flow to keep your daily operations running smoothly. A designated business credit card can provide you with a steady amount of money during seasonal lows, act as a quick and reliable short-term loan, and help you build your company credit score.
However, if you want to choose the right business credit card for your company, there are a few things to know beforehand. Understanding how it works and what its inherent limits are might help you use it more efficiently. Let us guide you through the complex world of credit cards:
A credit card is not a debit card
There are some substantial differences between a credit card and a debit card. Put simply, a debit card pulls all the money you spend directly from your banking account. A credit card, instead, charges everything to your line of credit. Essentially, a credit card is a short-term loan which may accrue interest if you don’t pay quickly enough (usually the “grace period” is around one month). Many credit card lenders offer a 0% interest policy for the first few months.
A business credit card is also different from a personal credit card
Your business account should (must) stay separate from your personal credit as much as possible. A dedicated business card is used to manage your finances without the risk of damaging your personal credit status. Dedicated business credit is also a viable choice for a business owner since his/her needs are quite different from a consumer’s.
The differences between secured and unsecured cards
Another big difference among credit cards is whether it is secured or unsecured. Secured cards are somewhat similar to prepaid cards – a cash deposit is required – the card’s credit limit is the amount of money deposited by the business owner. Secured credit is a great option for those with poor or no credit – as a business pays back the secured card each month, the monthly payments will positively report to credit bureaus. Another positive — the money used to secure the card can later be retrieved if you pay off the balance.
Unsecured cards are essentially lines of credit, and the credit limit depends on your credit history, cash flow, and income level. An unsecured card is riskier for lenders – which is why unsecured cards generally require a good credit score and decent income/revenue.
Keep a close eye on your monthly interest. A common mistake with credit card interest is to think that you will accrue interest only on the unpaid amount after the due date. Not true. Interest is calculated on your average daily balance during that month. The best way to avoid paying interest is to keep spending within your means and to monthly pay off as much of the card as possible.
Don’t forget to check for additional fees
Many credit cards charge additional fees and penalties, so be sure to read the fine print when choosing your card. For example, if you often travel overseas or frequently buy stock items from foreign markets, you should avoid getting a card with foreign transaction fees. Some credit cards charge annual fees of up to $500! Choose a card with an EMV chip – this will reduce the risk of fraud.
If you are carrying a balance on a card charging high-interest rates, considering opening a card with a low or 0% interest introductory rate and transfer the balance from the high-interest card onto the new card. A balance transfer can save thousands of dollars of interest payments – and allow each payment to payoff principal rather than interest.