WalletHub: Business Credit Cards

Wednesday, June 26, 2019
close up view of 4 credit cards

Ask the Experts

William Klinger
Professor of Economics & International Business, Raritan Valley Community College

How important are credit cards to small business owners?

Credit cards are very important to small business owners for several reasons. For many businesses, they are a source of financing. For long-term financing that is a terrible idea given the typical high interest rates charged on credit card balances. However, for some businesses it can be a financial advantage. If the business can use the items purchased on a credit card to create short-term income, the small business is generating income using other people’s money at no cost. For example, a restaurant may purchase groceries used to prepare dinners for that day. It gets the income from the dinners but doesn’t pay the expense of them until later.

Another reason credit cards are important to small business owners is that they can help to track the expenses of the business. This helps small business owners have the discipline to keep their personal expenses out of their business expenses.

Using a business credit card is also a way to a build credit history. This can be useful later when the business grows and looks for additional financing.

A side benefit to having a business credit card is that the business may accrue rewards for purchases, although that is not the primary reason to obtain a business credit card.

Why use a business credit card for business instead of a personal card?

It is important for small businesses to keep their business financials separate from their personal finances. Tax authorities will want to see that personal expenses are not reflected in the books of the business and business owners will want to be sure they can easily find business expenses. A business credit card helps to keep the personal and business lines clean. And the accountant will appreciate it too.

Does a company need to be incorporated to get a business credit card?

No. LLC’s and sole proprietors can also obtain a business credit card. For start-ups, a financial institution will probably look at the individual owner’s credit worthiness in determining whether or not to issue a card.

All things considered, are business credit cards better than personal credit cards?

Absolutely. They help to track expenses, can provide short-term funds to generate immediate income, and help to build a credit history. However, the small business owner should be very careful about using credit cards for long-term financing due to their high interest rates. Which means the balance should be paid.