If you’re starting a small business, you may be contemplating getting a business credit card. Though it’s not the most important undertaking associated with setting up a new small business, because of the rewards points that may be involved, the interest you may pay and the risk of carrying revolving debt, it isn’t a decision to take lightly.
If you’re considering signing up, use these guidelines to determine whether or not a business credit card can help you maximize tax deductions, boost your credit score and optimize savings.
[See: 10 Completely Careless Credit Card Mistakes You’re Making.]
A business credit card can simplify your life during tax season. This may be the most logical reason to get a business credit card if you’re setting up a small business.
“It’s easier at tax time if you use separate cards. [That way, there’s] no rummaging through statements to try to figure out which expenses were personal and which ones were for your business,” says Gerri Detweiler, education director for Nav.com, which helps business owners build and monitor strong business credit for free and matches them to financing.
In other words, if you only use your business credit card to buy business-related purchases, all of your statements will provide an easy way to track a year’s worth of business expenses.
You could do that with a business debit card, of course. But Detweiler cautions that if your business debit card gets stolen, and an identity thief takes the money from your bank account, getting your funds reimbursed can be more challenging than with a credit card.
You may be able to benefit from generous rewards and perks. If you get a business credit card, such as one from Capital One, Citibank or American Express, that offers points, miles or cash back and you pay off the balance every month, you can benefit from substantial savings. Of course, the math only works out well if you never carry revolving debt.
James Green, a Los Angeles resident who is the CEO and founder of HomeByHome.com, a business that matches homebuyers and sellers with real estate agents, says he looked for a business credit card that offers high cash-back rewards — or points that he could use to pay bills.
“I also wanted to find a card that had an enrollment incentive,” he says. “I found a card through my local Chase branch that offered a $1,000 reward if a certain spend level was met in the first three months, which I hit easily.”
You may be able to manage your cash flow better. Bob Shoyhet is the chief financial officer for Melillo Consulting, a technology solutions integrator in Somerset, New Jersey. He points out that you can use a business credit card to your advantage if you use it when managing cash flow.
“Think of it as your personal revolving line of credit when you need to get through cash shortfalls, which will inevitably happen. Using your card to buy inventory or paying a vendor while waiting on payment from your customer is a solid option until you’re cash positive,” Shoyhet says.
“Just remember that it’s still a credit card which carries interest, and that has the same risks as all credit cards do. They can pull you into debt abyss unless you vigorously manage them,” Shoyhet cautions.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
Many business credit cards have higher credit limits than personal credit cards, so you could theoretically wind up falling behind on your payments quicker than with a personal credit card.
Another thing to consider: If you flame out with your business credit card and you’re seriously delinquent on your payments, some, though not all, business credit card issuers could report you to credit bureaus. So, if your business bombs, your personal credit score could take a hit. On the other hand, if you make all of your payments with your business credit card on time, your personal credit score could get a boost. But there’s no hard-and-fast rule; it all depends on the credit card.
Shoyhet suggests people look for business cards that offer an introductory zero percent APR rate, “which equates to free financing and gives you financial leverage.” For instance, there’s the Capital One Spark Cash Select for Business card, which offers nine months at zero percent APR and the Chase Ink Business Cash Credit Card, which offers a zero percent APR for 12 months.
And like his fellow cardholders, Shoyhet also advises keeping business and personal expenses separate.
You may not have to worry about low checking account balances. That’s one reason why Tyson Downs, owner of the marketing firm Titan Web Agency in Riverton, Utah, likes his business credit card, the Wells Fargo Rewards Card, which, among other perks, offers five points for gas, grocery and drugstore net purchases. Downs uses his business card to pay all of his recurring bills off every month.
“In the event we have a slow month, it helps that the money doesn’t come directly out of our checking account. That’s rare, but it can happen,” he says.
He also says that the card can come in handy “in case we have a much higher charge for something than anticipated or an incorrect charge,” he says. “This lets us resolve any charges via the credit card as opposed to having them come out of our checking account.”
A business credit card may reduce your legal risk. There’s always the chance that a product or service you provide goes haywire, or somebody is injured at your place of business; then, suddenly, you find yourself being sued in court. Sure, it may seem unlikely, depending on your business, but just as you could possibly get in trouble with the IRS by intermixing personal and business funds, you could also get in trouble with a court. You don’t want a court deciding that they can go after the money in your business and your home because it’s linked to the same account and credit card.
Edward Ajaeb, president of Nighthawk Strategies, a private investigation firm in the District of Columbia, says that when he started his business in 2016, he got a business credit card about the same time. And protecting his legal standing was a benefit he saw right away.
“I am the owner of an LLC, so in order to comply with applicable business law and limit liability, I must maintain a ‘corporate veil,’ which is a legal concept that separates the business’s finances from my personal finances,” Ajaeb says. “Intermingling personal and business expenses could cause a court in a dispute [case] to assume misconduct or misappropriation, and thus hold the business owners or shareholders personally liable for any business debts or actions. Keeping accurate, separate accounts for personal and business finances is not only good practice, it ensures statutory compliance and reduces legal risk.”
[Read: Credit Cards With Annual Fees: How to Make Them Work for You.]
The business credit card could lead you into that aforementioned debt abyss. You may be concerned about finding yourself and the company buried in revolving credit card debt. If that’s your concern, then you may be better off waiting to apply for a business credit card until your company is operating more steadily. But once the money is rolling in, and your startup has gotten off the ground, there’s a case to be made for carrying a business card.
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Do You Need a Business Credit Card? originally appeared on usnews.com
