What is a Business Credit Card and How Do They Work?

What is a business credit card?

A business credit card is designed specifically for business use, rather than personal expenses. So, for instance, you might use a business credit card to pay for:

• Office supplies.
• Computer equipment.
• Business travel.
• Client dinners.
• Utilities, internet, and/or cell phone service for the business. 

Business credit cards can be helpful for businesses of all sizes. So whether you’re a sole proprietor, a freelancer, or the owner of a small business with dozens of employees, you could take advantage of a business credit card. 

There are two types of business credit cards available: revolving cards and charge cards. 

A revolving business credit card has a revolving credit limit you can use for purchases. As you make new purchases, your available credit shrinks. As you pay down the balance, that frees up the available credit. With a revolving card, you have the option to pay in full each month or carry a balance if needed. 

Charge cards are a little different. With a charge card, you may have a fixed spending limit or your card may have no preset spending limit. No preset spending limit on a business charge card means that your limit can change from month to month, based on your account activity, credit rating, and financials. 

With a charge card, you don’t have the option to carry a balance. You’re required to pay in full every month unless the card offers special extended payment terms. The upside of paying your balance in full, however, is that no interest accrues on the things you charge.

Business credit cards vs. personal credit cards

Aside from being designed for business spending, some other characteristics distinguish business credit cards from personal credit cards. 

1. Credit reporting

To apply for a business credit card, you’ll need to provide your Social Security number. Some card issuers may allow you to apply with your federal Employer Identification Number (EIN) instead, though it’s less common. 

Qualifying for a business credit card is based on your personal credit history, among other criteria. But once your account is open, your payment activity, credit limit, and other account details are reported as part of your business credit history.

Defaulting on a business credit card account can negatively affect your business credit history. Most card issuers require you to sign a personal guarantee for business credit cards. This guarantee makes you personally liable for any debt incurred. If you default, the card issuer could report your negative account history on your personal credit report. 

2. Card protections

Various federal protections cover personal credit cards, including those outlined in the 2009 CARD Act. For example, federal law limits consumers’ personal financial liability for fraudulent purchases made with their credit cards. 

Those same protections don’t automatically extend to business credit cards. If your business credit card is stolen, you could be held responsible for any charges resulting from the theft. The good news is that some business credit card issuers do limit fraud liability for cardholders. 

3. Rewards

Many business credit cards allow you to earn rewards on eligible purchases. That in itself isn’t much different from personal cards. Where the 2 diverge is in which purchases can earn rewards. 

For example, you may have a personal credit card that pays you cash back at grocery stores while business credit cards may pay cash back at office supply stores instead. Rewards programs cater to those expenses most often incurred by businesses, not individuals. 

4. Spending limits

Business credit cards can offer more purchasing power compared to a personal credit card. Where you might have a $10,000 limit on a personal card, your business card might bump that up to $50,000 or more, depending on your credit and business financials. The higher spending limits reflect the greater purchasing needs of businesses.

Pros of business credit cards

There are several good reasons to consider opening a business credit card if you’re not using one yet:

• It may be easier to get approved for a business credit card, compared to a business loan. 
• It’s possible to qualify for a card even if you haven’t started your business yet.
• Business credit cards offer flexibility since you can choose to carry a balance or pay in full.
• Earning miles, points, or cash back on purchases can save your business money. 
• It can be an easy way to keep track of business expenses.
• You can build a business credit score, which could help you qualify for loans or other lines of credit.
• No collateral is needed for unsecured business credit cards.
• Interest rates may be lower compared to other types of business financing, such as a merchant cash advance or invoice factoring. 
• Interest paid on your card balance may be tax-deductible. 
• You can use your card to meet a variety of spending needs.

Cons of business credit cards

On the other hand, there are potential drawbacks to consider:

• Some business credit cards charge an annual fee and/or foreign transaction fee.
• You’ll need good to excellent credit to qualify for the lowest APR. 
• Your credit limit may be less than what you’d qualify to borrow with a loan. 
• Signing a personal guarantee makes you personally responsible for business credit card debt.

How to choose the best card for your business.

If you think opening a business credit card account is the right move, the next step is choosing a card. When considering card options, there are a few important things to keep in mind.

1. Card use

First, think about what you primarily need a business credit card to do for you. For example, are you mainly looking for a way to earn rewards, or do you need a card to cover the occasional cash flow shortfall? Or are you looking for a card that can help you establish and build positive business credit history?

What you plan and need to use the card for can help you narrow down your choices as you shop around. 

2. Rewards

If rewards are on your list of credit card must-haves, consider which kind of rewards would be most valuable to you. 

Earning cash back could be good if you want to apply rewards as a statement credit. You may prefer to earn miles or travel points, however, if you take frequent business trips.

Aside from the type of rewards you might earn with a business credit card, factor in how different rewards programs are structured. 

Some cards, for instance, offer a flat number of miles, points, or cash back on everything you spend. Other cards offer tiered rewards in multiple categories. 

For example, you might earn 3 miles per dollar on travel purchases, 2 miles per dollar on dining and entertainment, and 1 mile per dollar on everything else. 

That type of rewards program could work in your favor if you spend more heavily on certain business expenses than others. One thing to watch out for with tiered rewards is a spending cap. Your card might limit you to earning a higher rewards rate up to a certain dollar amount each year. 

3. Cost

Keeping the bottom line healthy is always important, and while you may be earning money-saving rewards with a business credit card, you have to weigh their value against the card’s cost. 

As you compare cards, look at:

• Annual fees.
• Foreign transaction fees.
• Balance transfer fees if you’re planning on transferring a balance to the card. 
• Promotional APR.
• Regular purchase APR.
• Balance transfer APR.
• Penalty fees and APR. 

As a general rule of thumb, the better a card’s rewards program or the more generous the perks, the higher the annual fee tends to be.

4. Card extras

Rewards and cost matter, but don’t overlook any additional benefits a business credit card may offer. 

Say you’re interested in a travel card. One that offers perks such as free checked bags, travel insurance, complimentary business lounge access, and free WiFi might be even more valuable in your eyes if you take frequent business trips. 

On the other hand, benefits such as cell phone insurance or extended warranty protections may be more appropriate if you need a cash back card to cover everyday spending. Just like with rewards, measure the value of any added benefits against the card’s cost. 

5. Payment options

Last but not least, consider carefully whether you should apply for a business charge card or a revolving credit card that allows you to carry a balance. 

Avoiding interest charges is always good if you want to save your business money. The caveat is being certain that your business will be able to pay off what you’ve charged in full each month. 

If you’re still working to establish a newer business, your cash flow might not be consistent yet. In that scenario, you may be better off with a revolving limit card to start so that you have the option to pay over time if needed.

Best practices for using a credit card for your business.

Once you have a business credit card, be sure to use it wisely. Pay your bill on time each month and in full whenever possible to avoid interest charges. Redeem rewards strategically to get the most value and establish a business card policy before handing them out to employees. Lastly, maintain good records of what you spend with your card so you have a go-to reference for claiming those expenses as deductions at tax time.

Applying for a business credit card

Ready to explore options for a business credit card? Compare business credit card options here.