Maintaining positive cash flow and covering expenses are two of the biggest challenges you may face as a business owner. Charge cards and credit cards can provide working capital for short-term expenses, and they can…
Maintaining positive cash flow and covering expenses are two of the biggest challenges you may face as a business owner. Charge cards and credit cards can provide working capital for short-term expenses, and they can also be used to fund longer-term growth projects. But which one is right for your business? This guide compares the two to help you decide whether a charge card or a credit card is the better fit.
How Charge Cards and Credit Cards Work
The main difference between a business credit card and a charge card lies in the repayment requirements, says Jack Murphy, president of business banking at Citizens Bank in Boston.
“A charge card requires the full balance to be paid down monthly while a credit card provides more options,” Murphy says. “With a credit card, the customer can pay off the full balance but can also choose to pay the minimum amount or something between the two.”
Both charge cards and credit cards allow you to make purchases for your business, while paying for them at a later date.
Kurt Rathmann, CEO and founder of finance and accounting platform ScaleFactor, says a charge card might be preferable to business owners who have significant expenses and sufficient cash flow to manage the monthly payment obligation.
“Generally, you can expect higher limits on a charge card than a credit card because the charge card must be paid in full at the end of the month,” Rathmann says. He notes that many charge cards do not have a preset spending limit. This means rather than adhering to a set credit limit, your limit and your associated purchasing power may fluctuate each month, based on your spending patterns, business income, payment history and credit scores.
Credit cards, by comparison, impose a maximum ceiling on how much you can spend. Depending on the card, you may trigger an over-limit fee if your business purchases exceed your stated credit limit.
“A credit card is effectively a revolving line of credit, so the issuer might grant a lower limit because they do not know exactly when the money will be paid back,” Rathmann says. He says a credit card may be a better choice for someone with less certain cash flow who may need to carry a balance from time to time.
Getting Approved for Charge Cards vs. Business Credit Cards
Both business credit cards and charge cards require a credit check for approval. Compared with some business loans, a credit card may be easier to qualify for.
For example, instead of examining your time in business, revenue history or business credit scores, the issuer may look more closely at the strength of your personal credit score. The minimum personal credit score required is determined by the card and the issuer’s policies, but the application process is generally less intensive compared with applying for a loan.
The application and approval process for charge cards may include a more in-depth review of your business. “Concerning criteria for card approvals, lenders generally look at the business owner’s credit score, business revenue, length of time in business, number of employees, etc.,” Rathmann says. Because charge cards have no preset spending limit, you may need good or even excellent business credit to qualify. That might make a charge card a less-than-ideal choice if you have a newer business.
Comparing the APR and Fees
With any business financing option, it’s important to understand the cost. The two biggest cost factors to consider for cards are the annual percentage rate and fees.
Charge cards have the advantage of not charging interest because you’re paying your balance in full each month. Some charge cards, however, do offer a pay-over-time feature. When you use this feature, you have the option to carry over part or all of your balance from one month to the next, as long as you make the minimum payment. While this can add a new degree of flexibility to your charge card, interest charges apply until the balance is paid in full.
Credit cards, on the other hand, charge interest when you carry a balance. There may be multiple APRs associated with your card, including a regular purchase APR, a balance transfer APR and a cash advance APR. A penalty APR may also apply if you fail to make the minimum payment due on your account for more than 60 days. Each APR can be different, and the rate you’re assigned depends primarily on your credit score.
Charge cards and credit cards can also diverge when it comes to fees. Both charge cards and credit cards may exact annual fees and late payment fees if you miss a payment due date. Both cards can also charge foreign transaction fees, which apply when you use your card to complete a transaction in a foreign currency, and returned payment fees if your credit card payment doesn’t clear due to insufficient funds. Credit cards can also charge over-limit fees, balance transfer fees and cash advance fees, but these features may not be available with charge cards, so the fees don’t apply.
The largest fee associated with charge cards and credit cards is typically the annual fee. Overall, annual fees for credit cards, when they charge them, range from about $25 to $550. With charge cards for business, the annual fee typically ranges from about $95 to $450.
Earning Rewards on Business Spending
One of the most enticing aspects of using a charge card or credit card to cover business spending is the ability to earn rewards on those purchases. “Both business credit cards and charge cards can offer strong rewards,” Rathmann says.
With rewards charge cards issued by American Express, for instance, rewards take the form of points. The number of points earned per dollar is determined by the type of purchase. American Express business credit cards, on the other hand, may offer points, miles or cash back for each dollar spent. Business credit cards from other card issuers can also offer points, miles or cash back when you spend. The rewards structure — meaning the amount of rewards you can earn and which purchases earn rewards — varies from card to card.
Charge cards and credit cards can offer introductory sign-up bonuses, which allow you to earn additional rewards by satisfying a minimum spending requirement. But again, the value of these bonuses and the amount you need to spend to qualify for a bonus varies by card. For example, one card may allow you to earn a bonus after making your first purchase while another may require you to spend $5,000 or $10,000 within the first three months of opening your account.
Rewards can help save your business money. Miles, cash back or points may be redeemed toward business travel expenses, allowing you to save money on flights, hotel stays, car rentals and other travel expenses. Cash back can also be redeemed as a statement credit against previous purchases, meaning you have to pay less toward the balance. Points can also be redeemed for cash, gift cards and even merchandise.
Charge Card Pros and Cons
“The main benefit of charge cards is the ability to manage business cash flow by taking advantage of the float between making purchases … while not having to pay any interest or finance charges,” Murphy says. If you need to purchase inventory, you could use a charge card for those expenses and pay it off at the end of the month after your receivables have been paid, preserving your liquid cash reserves in the meantime.
While charge cards can offer predictability in managing cash flow, their inflexibility can also be their biggest drawback, Murphy says. If your cash flow dries up temporarily, for example, you may not be able to pay the balance in full. In that scenario, “not making a full payment can force the customer into delinquency status, impact their credit history and end up costing them more in finance charges and late fees,” Murphy says.
Pros and Cons of Business Credit Cards
Murphy says the main advantage of a business credit card compared with a charge card is that it offers more control over payments.
“If a business owner has a month where cash flow is tight, they can get relief by making a minimum payment that month, rather than the full amount due,” Murphy says. In some cases, he explains, business owners can find zero percent APR promotional offers that apply for a set period of time. A promotional APR can allow for more breathing room if you need to make a large purchase that you want to pay off over time or transfer a balance from an existing card to consolidate debt.
Of course, that payment control and flexibility can be a double-edged sword if your business accumulates a large balance on your credit card at a high interest rate. “The primary con is that a business that builds up a balance will have escalating finance charges,” Murphy says, a situation that can be exacerbated if you default on the card payments for any reason and a penalty APR kicks in. Penalty APRs can hover around the 30 percent mark, making it more difficult to gain traction in repaying a balance if you’re only making minimum payments.
Should You Get a Credit Card or a Charge Card for Your Business?
Despite their potential drawbacks, both charge cards and credit cards can make keeping track of business expenses easier. Murphy says that’s a less obvious benefit, but it’s not one to be overlooked.
“Card statements give business owners an easy hierarchy for categorizing expenses in the absence of an already established tracking system within the business,” he says. “In turn, this gives them access to the data about their expenses that can help improve decision-making.”
Businesses that need access to high spending power and can pay balances in full each statement period may benefit from a charge card. A credit card can be a more flexible choice for businesses that need the option to not always make a full payment.