Business credit cards

In short

A friend of mine runs a small landscaping outfit, and for two years she paid for mulch and fuel with her own personal card. You have probably done something like it yourself, and it works right up until the day the receipts pile up and the lines blur. A business credit card gives your company its own card and its own paper trail. Before you apply, find out whether the card asks you to sign a personal guarantee, because many do. Read the fee table and the interest rate, and ask what happens if you carry a balance. Keep every business purchase on that card and nothing else, so tax time does not become a scavenger hunt. Then read your card agreement to see how your issuer treats late payments and grace periods.

The whole of it

What it is

I once watched a bakery owner sort a shoebox of receipts on her kitchen table at eleven at night. Half of them were for flour. The other half were for groceries and a birthday present, and she could not remember which was which. A business credit card is meant to solve exactly that kind of headache.

It is a credit card issued to a business or to a person who runs one. You borrow money from the bank for a short time, and you pay it back later. If you pay it all back by the due date, you usually owe no interest. If you do not, the bank charges interest on what is left.

Many small business owners are sole proprietors, which means one person owns the business and there is no separate company in the eyes of the law. Even so, you can hold a business card. The bank will ask for your name, your Social Security number, and some facts about the business. Business cards often carry rewards, higher limits, and tools to give employees their own cards.

One thing surprises people. The card may be for the business, but you are often still on the hook personally. Keep that in mind.

How it works

If you are holding a business card right now, look at the statement. You will see a purchase list, a minimum payment, a due date, and an interest rate. Those four things run the whole show.

Each month the bank adds up what you bought and sends a bill. You may pay the whole thing, or you may pay a smaller minimum amount. If you pay less than the whole, the leftover balance grows by interest. Interest on cards is quoted as an annual percentage rate, often called the APR, which is the yearly cost of borrowing shown as a percent.

Most business cards give you a grace period. That is a stretch of days between the end of the billing cycle and the due date when new purchases do not cost you interest, as long as you paid the last bill in full. Miss a full payment, and the grace period can vanish. Then interest starts on new purchases right away. Read your card agreement to see how yours treats this.

Then there is the personal guarantee. Many issuers ask the owner to promise to repay the debt from personal money if the business cannot. Whether a card reports to your personal credit file is a matter of each issuer's own policy. Some may, and some may not. Look for the credit reporting section of your agreement, or call the issuer and ask. The wording is there, plain as day, if you look for it.

Rewards work like a small rebate on what you spend. A card might return a slice of each dollar as cash or points. That sounds lovely, and it can be. But a reward only helps if interest and fees do not eat it up.

The numbers, and where to find yours

I once helped a neighbor read the tiny print on a card offer, and we found the whole story in a box near the bottom. Federal rules require card issuers to show key terms in a table, often called the Schumer box. It lists the APR, the annual fee, and charges for late payments and cash advances. Your card agreement has it. Your online account has it too.

Some rules protect consumer cards more than business cards. The Credit CARD Act of 2009 added many protections for consumer accounts. Business accounts do not get all of them. So a business card may have looser rules on things like rate changes. Ask the issuer directly, and get the answer in writing if you can.

Some figures are set by law or by regulators and change over time. The most a late fee can be on consumer cards is one example, and that rule is tied to the consumer side. For your own card, the numbers that matter are printed in your agreement. Here are the places to look.

Your APR is the current figure, which the official source publishes each year. Your late fee is the current figure, which the official source publishes each year. To learn how the law treats card accounts, the Consumer Financial Protection Bureau has plain guides on its website, and the Federal Reserve publishes shopping guidance on credit cards. Read those, then read your own agreement. Trust the paper in your hand over any headline.

A worked example

A woman named Denise runs a small print shop. She has one employee and a few steady clients. One month she puts 2,400 dollars of paper and ink on her business card. Her card has an APR of 24 percent a year, and she wants to see what happens if she pays only part.

Let us do the math slowly so you can check it. A yearly rate of 24 percent works out to 2 percent a month, because 24 divided by 12 is 2. Say she pays 400 dollars and leaves 2,000 dollars unpaid. The interest for that month is 2,000 times 0.02, which is 40 dollars. Her balance is now 2,040 dollars before any new purchases.

Now suppose she pays it all instead. She pays 2,400 dollars by the due date. The interest is 0 dollars, as long as she paid the prior bill in full and is inside her grace period. The card cost her nothing but the annual fee, if there is one.

Say the card has a 95 dollar annual fee and gives back 2 percent on purchases. On 2,400 dollars, the reward is 2,400 times 0.02, which is 48 dollars. Across a year, if she spends 2,400 dollars every month, that is 28,800 dollars, and the reward is 28,800 times 0.02, which is 576 dollars. Take away the 95 dollar fee and she nets 481 dollars. But if she carried a 2,000 dollar balance all year at 2 percent a month, she would pay about 40 dollars every month in interest, or 480 dollars. That would wipe out nearly the whole reward.

Denise sees it plainly. The rewards only help her when she pays in full.

Where it goes wrong

I have seen good people get tangled here, and it is rarely because they were careless. It is because the card felt easy. The first trouble is mixing business and personal spending. When the two run together, your books get messy, and so does any claim that the business is truly separate.

The second trouble is the personal guarantee. If the business slows down, you may still owe the debt from your own pocket. That is not a reason to fear the card. It is a reason to know what you signed.

Another snag is carrying a balance and thinking of the rewards as free money. As Denise found, interest can swallow them. Fees hide there too. Some cards charge for cash advances, for going over the limit, or for foreign purchases. Late payments can trigger penalty rates and hurt your credit.

A last one is giving employees cards without any rules. Set a limit and a clear purpose for each card. A short note on paper can save a long argument later.

Questions to answer before you leave this page

Do you know whether your card asks you to guarantee the debt with your own money, and have you read where the agreement says so? Can you pay the full balance every month, and if not, what will the interest cost you in real dollars? Have you looked at the fee table for the annual fee, the late fee, and the cash advance fee? Are all your business purchases going on this card, and only business purchases? Who else can use the card, and what limit have you set for them? And when tax season comes, will your statements tell the story of your year clearly enough that you could hand them to someone and sleep well?