As a small business owner, securing a business credit card could be a significant stride towards enhancing your operational efficiency and financial management.
A business credit card not only amplifies your buying capacity, enabling you to acquire essential goods and services but it also simplifies the process of segregating personal and business expenditures.
Furthermore, it streamlines the expense reporting process during tax season. To leverage these financial and operational advantages, understanding the prerequisites for obtaining a business credit card is paramount.
Eligibility Criteria for a Business Credit Card
Each credit card issuer will have a unique set of requirements encompassing various elements, such as business income and credit score, that they consider before offering a card.
In most scenarios, you can anticipate that the issuer will examine both your personal credit report and that of the business to make an informed lending decision, particularly if your business has yet to establish its own credit history.
Furthermore, the majority of business credit card companies necessitate a personal guarantee. This implies that you, as the cardholder, will be held personally accountable for any remaining balance or debt that the business fails to repay.
How Business Credit Cards Function
Business credit cards bear a striking resemblance to personal credit cards in their operation. Upon approval, you will receive a revolving credit line, which you can employ to cater to any emergent business requirement. Similar to personal cards, you will need to manage your business account responsibly by ensuring timely payments.
Interest will be charged on any balances carried from month to month, unless you are within an interest-free grace period. It’s crucial to note that due to the potential accumulation of significant business expenses on your card, it is advisable to opt for cards that offer reward points or cash-back benefits for travel, shipping costs, and more.
However, a notable difference between business and personal credit cards lies in the limited applicability of the Truth in Lending Act (TILA) to business accounts. TILA was enacted to mandate lenders to provide consumers with comprehensive information about the terms and cost of the credit they are offering.
Thankfully, two fundamental clauses of this law protect business owners. Primarily, you cannot be issued a card unless you expressly request one. Secondly, in the event of your card being lost or stolen, your responsibility for fraudulent charges is capped at $50.
Steps to Obtain a Business Credit Card
Navigating the path to getting a business credit card may seem intimidating, but the following steps can simplify the process for you.
Verify Your Credit
Essentially, you need to review your personal credit report and rectify any discrepancies present, which could range from incorrect personal details to inaccurate account status, balance, or credit limit.
To access your report from the three primary nationwide credit bureaus, you can visit AnnualCreditReport.com. If you identify an error, submit a written dispute to both the credit bureau and the reporting lender, including any supporting documents. Your dispute must be investigated, and if the error remains, you are legally entitled to approach the Consumer Financial Protection Bureau.
Remember that identifying and rectifying errors can elevate your credit score, improving your likelihood of securing a business credit card.
Evaluate Card Options
With a wide array of business credit cards in the market, the next step involves a thorough examination and comparison of the diverse options available. You should take into account the following key factors:
- Type of card (secured, unsecured, low-interest, etc.),
- Annual Percentage Rate (APR),
- Introductory interest rates,
- Promotional rates,
- Associated fees (annual, late payment, foreign transaction, cash advances, etc.),
- Rewards (points, airline miles, hotel stays, cash back, etc.),
- Eligibility prerequisites (such as credit score and business income),
- Credit reporting (ideally, the card should report to business credit agencies, helping you build business credit separate from your personal credit).
When selecting a card, consider the unique requirements and goals of your business. If your business is budget-conscious and might need to carry a balance, a card with no annual fee and a low interest rate might be a suitable choice. On the other hand, if your business entails frequent travel, a card offering airline miles or hotel stays could be more advantageous.
Submit a Card Application
Upon identifying the appropriate business credit card for your venture, it’s time to apply. Each issuer will have a distinct application form and will require diverse information to make a decision. However, be prepared to provide personal and business information such as your personal annual income, personal credit score, type of business, business longevity, annual revenue, and federal tax ID, among others.
Alternatives for Individuals with Poor or Limited Credit
Even with a subpar or non-existent credit history, acquiring a business credit card might still be within your reach. One route to consider is having a business partner with an exceptional credit record co-sign the application, thus enhancing the likelihood of approval. However, if this is not feasible, other alternatives are available.
Secured Credit Card
This type of card is typically more accessible as it demands a security deposit from the bank to open an account. The sum of your security deposit then becomes your available credit limit. The card can be used for purchases, and making payments on time can reflect financial responsibility and bolster your credit profile.
Over time, if the account is managed appropriately, the bank may upgrade you to an unsecured card, which does not necessitate a backing deposit. However, it’s crucial to note that if the balance owed is not paid, or if you default on a secured business credit card, the issuer is permitted to seize your security deposit.
Vendor Credit
Another strategy to enhance your credit standing and cash flow is through vendor credit. In this arrangement, you procure products and services from your vendor and agree to pay within a specified net term.
Provided that payment is made within the period stipulated by the vendor, you will not be subjected to any interest charges. This essentially operates like a short-term, interest-free loan for your business. It’s not uncommon for vendors to examine your credit history prior to approval, but you can enhance your likelihood of a positive outcome by regularly settling your invoices on time or even in advance over an extended period before applying. In this context, using tools such as an official receipt template word can help ensure accuracy and timeliness in your invoicing process.
Starting with a relatively short net term, for instance, 10 or 20 days, can demonstrate your capacity to handle financial obligations. Consequently, when you next apply for a business credit card, a history of well-maintained vendor credit agreements might tip the scales in your favor.