Is Your Business Ready for a Credit Card?

Katie McBeth  | 

Small business finance is certainly a stressful topic. Keeping on top of your own spending can be hard enough, but tracking all your business spending as well? It’s easy to get lost in the paperwork!

As your small business grows and matures, you’ll need to find ways to stop dipping into your personal budget. Your small business has a credit score, too, so why not utilize it? Over time you may come to a point where you’re thinking up ways to help stretch your budget just a little bit more.

Enter the business credit card. How can you know when you’re ready for a business credit card? Here are some tips to help you decide if now is the right time to expand your business’ credit.

When to Transition

The Small Business Association notes that transitioning to a business credit card is not only an important milestone, but a vital one as well. A business card can both help you prevent co-mingling of personal and business resources, as well as help you keep more accurate records of your spending. There’s no question that you will need a business credit card eventually, but when is the right time to start shopping around?

Fortunately, there’s no real timeline on when you should start searching for a card. You can do it as soon as you have the business idea in mind. The only restrictions that might limit opening a card are your personal score and meeting the card holder’s income requirements.

In fact, it might be smart to open up a business credit card as soon as possible. Small businesses are no strangers to hurdles during the first couple of years, and sometimes a little extra financial support can help you weather through the storm. Plus, as Time Money author, Gerri Detweiler, notes: “Most business credit cards don’t report activity to owners’ personal credit reports unless they default. That means if one month you need to charge a large amount to stock up on inventory, for example, your personal credit scores are immune from a high balance that can hurt your scores.”

However, you will also need to be prepared for the challenges of owning a high-spending small business credit card. In particular, you’ll have to be aware of card holder’s agreements and the potential changing due dates for payments. Luckily for personal credit card holders, they have the protection of the Credit Card Act of 2009. Those same protections, though, are not afforded to business card holders. Be sure to do your homework before you sign up for your first card.

Freelancers: Yay or Nay?

The perks of a business credit card are certainly alluring, but do they work for everyone? Freelancers can open up a line of business credit, but is it worth the effort?

Considering the majority of modern freelancers within the gig-economy are of the sort that work from home — such as creative writers, graphic designers, and ecommerce gurus — it’s very unlikely that they will fit the bill of a big spender. There might be one or two big purchases made throughout the year that could be placed on a credit card, but in general, freelancers are not within the demographic that normally need a business line of credit. In this way, freelancers should be careful when researching business credit cards.

However, there could be some benefits to opening up a separate credit account to help track your business expenses. This would work even if it’s simply a personal account, but used only for business purposes. As long as you can find a low interest rate card and prevent it from becoming maxed out, it can help tremendously come tax season.

Keeping business expenses and personal expenses separate is a smart move for freelancers, but that doesn’t always mean you have to seek out a high-spending business credit card line.

Getting a Credit Card Line Over a Bank Loan

Of course, there are other options for freelancers and small business owners that need to be considered. Specifically: a bank loan versus a credit card. When should you seek out a bank loan over a high-spend credit line?

There are a few factors to consider when weighing your options. For one, getting accepted for a bank loan might be a little more difficult if your business is fresh off the ground. Traditionally, bank loans need proof of profitability before they can consider funding your business. This is due to the larger amount of money that they can loan (anywhere from $50,000 to a million or more), as well as the lower interest rate and longer repayment period. Since the bank will be giving you more money, they want to make sure you’ll be able to pay them back entirely.

On the other hand, if your business is doing well and you want to expand or branch out the business, a bank loan might be the perfect fit. Every situation is different, but when you’re looking to spend a lot of money and pay it back over a longer period of time, the bank loan could be the right decision.

Small business credit cards work especially well for those small day-to-day expenses, as well as when you need to make small upgrades or fill in the gap between a big sale and rent being due. There are many different applications for the small business credit card, but bank loans tend to be more focused on the larger scale additions or purchases.

Either way, it’s important to do all your research before diving into a credit or loan account. What will your interest rate be, and how long will the payments last? Is your revenue stream at the business strong enough to ensure you won’t default on the loan or credit line? What perks can you look forward to if you get a small business credit card?

Don’t let the necessary homework scare you off from starting this major milestone. Opening up your first line of credit for your business is an exciting step, and will certainly help you keep both your finances and your mind at ease!

For more tips and guides, visit our small business resource center. Try to drive down your interest rates? Trying to raise your credit score? Visit the Fiscal Tiger credit score resource center.

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Katie McBeth is a researcher and writer out of Boise, ID, with experience in marketing for small businesses and management. Her favorite subject of study is millennials, and she has been featured on Fortune Magazine and the Quiet Revolution. She researches SEO strategies during the day, and freelances at night. You can follow her writing adventures on Instagram or Twitter: @ktmcbeth

This post was updated February 28, 2019. It was originally published April 18, 2017.