As a freelancer, you typically don’t have a brick-and-mortar business with a lot of overhead. But it can still make sense to get a business credit card for your venture. Whether you’re a writer, a designer or a musician, these tips will help you learn everything you need to know about how a business credit card can help you manage your business.
Freelancers Can Get a Business Credit Card, But Should They?
If you do contract work for one or more clients as a freelancer and get paid on a 1099 basis — meaning your clients don’t take taxes out of your payments and you receive a 1099-MISC or 1099-K form at the end of the year to file your taxes — you’re considered self-employed by the IRS. This means that you may qualify for a business credit card, even if you’re just a sole proprietor.
“Freelancers don’t have a big staff, they don’t have a lot of resources, and there are concerns around cash flow management and access to capital,” says Ginger Siegel, the North America small business lead at Mastercard. “Credit cards provide a very strong opportunity to help with cash flow management, access to capital and also tracking things .”
Despite these benefits, it’s not in every business owner’s best interests to have a business credit card. Before you apply for one, it’s important to know exactly how a business credit card can make your life easier and what pitfalls could make it more trouble than it’s worth.
[Read: The Best Rewards Credit Cards of 2018.]
5 Reasons to Consider Applying for a Business Credit Card
When used responsibly, business credit cards can help you build your business and potentially even boost your bottom line. Here’s how:
They provide financing. If you need equipment or materials to build your freelancing business but don’t have the cash to purchase them, a business credit card — preferably one with an introductory zero percent annual percentage rate promotion — can help you get what you need.
You might be thinking about getting a business loan to do the same thing, but qualifying for a business loan can be tricky. Not only can the process take a while, but business lenders also often have special requirements that may include considering how long you’ve been in business and how much revenue you’re generating. Business credit cards, on the other hand, don’t have such requirements.
They separate your business and personal expenses. “When we talk to accountants, they will say that the No. 1 issue that they have with small businesses is the inability to separate out their expenses and revenue,” says Siegel. “It gets much more difficult to efficiently run your business” when you’re using one card for both personal and business expenses.
It can also get complicated when it’s time to file your taxes for the year. By using a separate business credit card for business expenses only, you won’t have to spend any extra time trying to figure out which expenses you can deduct from your business income and which purchases are personal.
They help build your business credit. If you plan on expanding your business down the road, it’s essential to have an established business credit history to make it easier to get a business expansion loan or another form of capital.
You can build a business credit history by using your business credit card regularly, keeping your balance relatively low and making your monthly payments on time.
Some offer business-specific rewards. While some business credit cards offer a flat rewards rate on all your purchases, some provide bonus rewards on purchases in specific categories. So if you spend a lot on online advertising, shipping or travel, you could earn more rewards from some business credit cards than you do from your personal credit card.
[Read: The Best Travel Rewards Credit Cards of 2018.]
Some offer expense management tools. “Some credit cards include services where they provide the business owner with software or applications that help them track expenses,” says Paola Garcia, assistant vice president at Excelsior Growth Fund in New York.
American Express, for instance, automatically syncs your transactions with QuickBooks and allows you to upload photos of your receipts to match them with your expenses.
How Business Credit Cards Can Harm Your Business
The average credit card interest rate is 15.54 percent, according to May 2018 data from the Federal Reserve, and some business credit cards charge even more in interest. If you regularly carry a balance on your card or finance a large purchase over time, the monthly interest could eat into your profits.
In fact, Garcia doesn’t recommend using business credit cards to finance business expenses over time. “I think that that is one of the worst mistakes anyone can do,” she says. “From the very beginning, it puts you in a very risky situation.”
Garcia does, however, find value in the features business credit cards offer if you’re using one for everyday expenses and paying it off in full each month.
Also, some credit cards charge various fees, including annual fees, cash advance fees, balance transfer fees and foreign transaction fees. You can avoid most of these fees, however, simply by picking the right card and not using it for cash advances or balance transfers.
What You Need to Get Approved for a Business Credit Card
The primary difference between business credit cards and personal credit cards is that business cards typically require that you have a legitimate business. As a freelancer, that shouldn’t be a problem.
It might still be difficult to get approved, however, if you don’t have great personal credit. Even if you have an established business credit history and an employer identification number, you’ll still need to provide your Social Security number so the card issuer can run a personal credit check.
The best business credit cards are typically targeted to business owners with good or excellent credit. However, there are some options if you have fair credit.
In addition to a decent credit score, you may also need to meet a minimum income requirement. This is because the card issuer needs to know if you can afford to pay off your purchases. The income requirement can be hard to meet, however, if you’re just starting out with your freelancing business and don’t have any other income.
That said, having an idea of your future expenses can help if you’re new. “It’s important to know how much you think you’re going to spend in a year,” says Siegel. “That will give better information to the financial institution, and it can also let them know that you’ve thought through why you need a credit card.”
[Read: The Best Cash Back Credit Cards of 2018.]
Finally, you’ll typically need to provide a personal guarantee to get approved. This means that if your business can’t manage to pay off the debt you’ve incurred with the card, you can’t hide behind it. At that point, you would be personally responsible to make the payments.
How Business Credit Cards Affect Your Personal Credit
For the most part, business credit card issuers don’t report your account activity on your personal credit report. So using one won’t help you build your personal credit history.
If you fall behind on payments, however, or default entirely, the card issuer may choose to report these negative events on your personal credit report. As a result, it’s important to recognize that your liability isn’t limited with business credit cards, regardless of how your business is structured.
How to Pick the Right Business Credit Card
There are many business credit cards on the market, and each comes with its own set of rewards, benefits and other features. As such, there’s no single best card out there for every business owner or freelancer. As you consider which one to get for your business, there are three factors to think about:
Your personal credit score. Even if you want a certain business credit card, you’ll have a hard time getting it if your credit score doesn’t meet its requirements. Check your credit score and match it with the right credit score range. Then you can pick a business credit card based on the range in which your score resides.
If you have poor credit, you may have a hard time finding a decent business card. In that case, it may be a good idea to apply for a personal secured credit card to build up your credit so you can have a better chance of getting approved for a good business card in the future.
Your typical business expenses. If you’re looking at business credit cards that offer rewards, the right one for you will provide bonus rewards on your top spending categories. If you don’t spend much or you don’t spend a lot in any specific category, however, some business credit cards offer a rewards rate on all your spending.
Either way, knowing your top spending categories can help you find a card that gives you more bang for your buck.
Your personal preferences. It’s important to know what you want out of your business card. If you want an introductory zero percent APR promotion, for example, you may be willing to get a card that doesn’t offer the best rewards. If you want a rewards card, though, you’ll need to know if you prefer cash back or travel rewards.
“Check to see if there’s a sign-up bonus and how much,” says Garcia. “There’s so much competition right now, and most business credit cards are offering bonuses just to get the card.”
Also, consider whether you’re willing to pay an annual fee. Depending on the situation, an annual fee business credit card can be worth it. But if you don’t use the card much or take advantage of its perks, the costs may outweigh the benefits.
The Bottom Line
Business credit cards can be a great addition to your freelancing business, but only if you use them responsibly. Compare several business cards and consider their rewards, interest rates and fees, and extra perks. Once you find the right one, use it regularly but avoid carrying a balance if you can. By paying your balance in full, you can squeeze more value out of the card without putting your bottom line at risk.
More from U.S. News
The Basics of Business Credit Scores
The Pros and Cons of Credit Cards
How to Prequalify for a Credit Card
Business Credit Card Tips for Freelancers originally appeared on usnews.com
