Businesses, no matter how small, need capital to run smoothly. A business credit card can be a solution. You don’t necessarily need a business credit card when you’re self-employed. But a card can be helpful…
Businesses, no matter how small, need capital to run smoothly. A business credit card can be a solution.
You don’t necessarily need a business credit card when you’re self-employed. But a card can be helpful for managing your everyday business spending or financing larger expenses so you can grow.
Business Credit Cards Can Simplify Taxes and Accounting for the Self-Employed
A business credit card can benefit self-employed individuals, including freelancers, independent contractors and sole proprietors, in more ways than one. The first has to do with organization and record-keeping.
“For people who are self-employed, it may often times feel like their personal and business lives are one and the same,” says Jay Singer, senior vice president, global small and medium enterprises at Mastercard. “Having separate financial accounts helps keep those flows organized and accounting records straight.”
That’s particularly important at tax time. In a 2018 QuickBooks survey of freelancers, one of the biggest challenges reported was keeping tabs on business-related paperwork. Business credit cards are extremely important for budgeting and filing taxes, says Alex Shvarts, chief technology officer at small business funding platform FundKite.
“Those who are self-employed need to know the difference between how much they spent on gas for travel and how much they spent on personal groceries,” he says. “This makes it much easier to itemize deductions during tax season to lower your taxable income.”
Business Credit Cards Can Smooth Cash Flow, Build Credit
Self-employment doesn’t always guarantee a steady paycheck or that you’ll be paid on time. A 2018 survey from Bonsai, a contracting and invoicing platform for freelancers, found that 29 percent of freelance invoices are paid late. Having to play the waiting game could make it harder to run your business.
“If a freelancer does not have cash on hand, this ties up operations,” Shvarts says. “Using a credit card until they get paid frees up cash flow and keeps their work running smoothly.”
Shvarts says business credit cards may offer better terms than personal credit cards, including higher credit limits and the ability to extend your billing cycle. “A card may allow cardholders to carry a balance for up to 60 days with no interest or offer a discount if they pay early,” he says.
Beyond managing cash flow, a business credit card is also a way to establish and build business credit.
Why is that important? At some point, you may decide you want to grow your business. If you don’t have cash on hand, you may consider applying for a business loan. A good business credit score can improve your chances of getting approved.
Self-employed individuals can build a good business credit score by using their business credit card responsibly. That includes:
— Paying credit card bills on time each month
— Maintaining a low credit utilization ratio on business credit cards or paying the balance in full each month, if possible
— Keeping older business credit card accounts open even if you don’t use them regularly, as this can benefit your overall credit age
— Spacing out applications for new credit card accounts to minimize any negative credit score impact from hard inquiries
Are There Any Downsides to Business Credit Cards When You’re Self-Employed?
The answer to this question depends largely on how many cards you have and how you use them.
For Ha, the biggest drawback of having multiple business credit cards is simply keeping track of different balances, rewards and payment due dates. Establishing email or text alerts to monitor new purchases, card balances and due dates can be a simple work-around.
Having too many cards can still work against you if it negatively impacts your business credit score or lenders perceive you as struggling with cash flow, Shvarts says. “Keeping the number of cards to a minimum is best and helps you remember due dates.”
Self-employed individuals also need to consider how a business credit score could affect their personal credit and finances. Applying for a business credit card can ding your personal score if the card issuer uses your Social Security number to check your credit.
Once the business credit card is opened, account activity is reported on your business credit report. Depending on the issuer, account activity could be reported on your personal credit report. Business credit cards from some issuers only show up on your personal credit history if you’re delinquent, which could damage your personal credit scores.
Late payments could also trigger a penalty annual percentage rate. If you typically carry a balance from month to month on your business credit card, a higher penalty rate could make doing so more expensive.
Beyond that, business credit cards often require a personal guarantee. A personal guarantee means you personally agree to repay your business credit card debt. If you default on the card, the credit card company could sue you personally to recover the outstanding balance owed.
Choosing and Applying for a Business Credit Card When You’re Self-Employed
Applying for a business credit card when you’re self-employed isn’t that different from applying for a personal credit card. You’ll just need to give the credit card company all the necessary information, such as:
— Your name and role in the business (founder, owner, etc.)
— Your business name and structure (sole proprietorship, LLC, etc.)
— Your Social Security number or Employer Identification Number
— Phone number, address and email
— Years in business
— Annual business revenue
— Annual personal income
— Monthly housing payment
— Rent or own status
You may also be asked how much you think you’ll spend with the card each month or whether you have any employees.
Remember, you don’t necessarily need a lengthy time in business or large annual revenue to get approved for a business credit card. Using your personal credit, you can qualify for a business credit card when you’re self-employed, even if you’re running a small freelance business or startup.
When it comes to actually choosing a card, look for one that fits how you spend money on your business and offers repayment terms that fit your cash flow. If you’re interested in earning rewards, Ha suggests comparing introductory bonus offers and ongoing rewards carefully.
“Look for cards that offer bonuses in the categories you spend in,” Ha says. For example, his business spends a lot on ads, so he uses a card that offers three points per dollar on advertising purchases. And consider using cards that earn high rates in different spending categories to maximize rewards earnings.
Shvarts cautions self-employed business owners to read the terms carefully to make sure they understand what they’re signing up for. If the card waives the annual fee for the first year, for example, you’d want to be sure the rewards and other benefits are worth paying the fee once it kicks in.
And most importantly, use the card to run and grow your business wisely.
“Don’t buy more than you can afford,” Shvarts says. Taking on debt to expand or cover expenses in the short term may be necessary but “remember to be smart about your spending.”