When starting a business, one thing that seems to be always at a premium besides time is funding. Money matters, and from time to time you will need to spend it right now to land that next client, replace that computer or printer, or even make payroll.
You will also want to have credit cards that are in your business name, but getting those may take some time. Starting out is a challenge, and for your startup you will need some credit options. Here are a few business credit card options, and the pros and cons of each.
Using Personal Cards
When you are first starting out you may need to use personal cards. In this case, it is a good idea to get a card that is dedicated just to business use. It is easier to keep track of expenses when they are not mixed with your personal ones. Examine some credit card offers and choose a card that has the right features for your business.
Pay special attention to interest rates and credit limits. Often you will need higher limits for your business if you can get them, and you will want to get the lowest interest rates you can. Sometimes companies will offer introductory or limited time interest rate offers. Use these, and at the end of the term, ask for an extension of the lower rate. If you have been a good customer, these will often be granted to keep your business.
In some cases, once you have had the card for a while, paid on time, and stayed within a reasonable distance of your credit limit you can transfer the card from a personal to a business one, or reapply and get a business card instead of a personal one.
Building Business Credit
Of course, as soon as you can you will want your business to build its own credit. At first, this credit will be tied to your personal credit score, but over time the business, through its EIN rather than your social security number, will build its own credit rating.
Doing this means that as soon as possible, you replace your personal cards with business ones. When you do, follow some rules of thumb:
- Pay on Time: This is the biggest factor in credit score
- Don’t Overuse Credit: Being consistently too close to your credit limit is bad news for your score
- Don’t Over Apply: Every time you apply for new credit, it impacts your score. Apply to often and your score can really take a hit.
- Don’t Borrow More Than You Can Repay: Sounds like common sense, and simple math, but people overborrow all the time. Don’t do it as a company.
Business credit cards can be a great thing, and help to build your company credit, but you will need to use them wisely.
One way to build personal and business credit is to use secured rather than unsecured credit cards. This means that you have a savings account, CD, or asset to secure the credit limit on the card similar to a home or auto loan.
In this way, a secured card more resembles an installment loan except that you don’t get the money up front all at once. You can use the card as need be like a regular credit card, pay it off often, and make payments on time. Eventually you will be able to remove the security and convert the card to an unsecured one.
These cards are often offered if you have less than perfect credit and are looking to rebuild it or if you are just getting started. These are a great way to build both your personal and business credit if you use them properly.
Rewards cards are another type of business card that can really work well. The points you earn from travel and rental cars can be great if you do that a lot for business, but there are cash back cards from several different banks and lenders, and even store branded cards like the ones from Costco that earn you additional cash on certain purchases.
For many of these types of cards there is a fee to enter the rewards program. It is important that you make sure you will earn enough rewards in the categories they offer to surpass these costs. If you aren’t likely to, choose another rewards card that fits your business lifestyle.
Also, rewards cards are not for everyone. If you are just starting out, you may have a lot of startup expenses that you charge on your cards, and rewards can be a great way to save money. But if you use your cards very little and rarely carry a balance, unless you plan to make a large purchase or two that will make the rewards worthwhile, you might never make the fees back. Shop around and find the rewards card that works for you.
Lines of Credit and Credit Cards
A line of credit is similar to, but not the same as, a credit card. It is easy to get these confused, as a line of credit will sometimes come with a debit card you can use like a credit card. While this is a similar revolving debt, a line of credit is often secured by some asset, or if not secured, carries with it a higher interest rate than a typical credit card.
Lines of credit are usually issued by your bank or a similar institution. It is more like a loan, but one that only charges you interest on the amount you use from the line of credit. These are another type of business funding but should not be confused with business credit cards.
There are all kinds of options for business credit cards. Some carry higher interest than others, and some are for those with poor credit who need to rebuild or are designed for businesses and individuals just starting out.
Once you have a business plan and have set your budget, you can shop around for and determine the business credit card option that is right for you.