Do you own a business? Are you a freelancer? If you want to build business credit for your company (even if that company is only you), here are six things you should know about business credit cards and how they relate to your business’s credit standing.
1. Sole proprietors can also apply for a business credit card.
Although some corporate charge and credit accounts are only available to corporations, that rule does not apply to many standard credit cards marked “business.” In fact, where the application asks for an FEIN (Federal Employer Identification Number), the applicant’s Social Security Number can be used in its place if a sole proprietor does not have a separate tax ID number for the business. In that case, the creditor will consider the applicant a sole proprietor.
2. Business credit card applications are approved/denied based on the applicant’s personal credit when no business credit file exists.
Even if the applicant has an FEIN, approval will depend on the applicant’s personal credit standing if no credit file has already been established for the business. Providing the FEIN on the application does not circumvent the personal guarantee or mask the owner’s Social Security Number.
3. A business credit file is the only means with which to avoid giving a personal guarantee on a traditional business credit card.
Credit accounts are always approved or denied based on the applicant’s credit. Creditors have no other way of assessing the likelihood that the account owner will repay the debt. So, if an individual wants to avoid making a personal guarantee, then the business must pass muster as an approvable applicant. To accomplish that, the owner must establish a credit file for the business another way before applying for the card.
4. Business credit cards don’t always lead to the creation of a business credit file.
This is possibly one of the most frustrating gotchas of business credit. Getting and using a business credit card will not result in the creation of a business credit file if the application was based on the owner’s personal credit.
That said, once a business credit file is established, a positive history with any credit account will help build business credit just as a consumer credit card helps build personal credit. If the account is opened with a personal guarantee and the business later gains a credit file, you may need to reapply for the card without a personal guarantee if you want to see it reported to the business credit agencies.
5. Business credit cards don’t always show up on the individual’s personal credit file.
Even when an account is opened with a personal guarantee, business credit cards are often not reported on the consumer’s individual credit file if they are in good standing. The upside is that high utilization and low account age won’t lower the consumer’s credit score. The downside is that low utilization and high account age won’t raise the consumer’s credit score.
If the account goes into default, it will show up on the consumer’s personal report, accompanied by the predictable cascade of negative consequences. The applicant remains liable for the debt, whether or not it shows up on his credit report.
6. Business credit can be established without the use of credit cards.
To create a file and track business credit, the reporting agencies generally need two pieces of data. They need to see evidence that the business exists, such as a business telephone listing, and at least one trade line. That means the business owner needs to establish a credit account in the business’s name with a company that reports to the business credit reporting agencies, and use it and pay it off a few times.
To establish a file, Experian recommends these initial steps:
– Incorporate the business and obtain an FEIN
– Open business bank accounts
– Get business telephone service
Also get a DUNS number from Dun & Bradstreet (it’s free).
Note that you don’t have to incorporate to be seen by the credit bureaus as a legitimate business. Sole proprietorships and partnerships are also valid. In fact, a business telephone listing will get you to a business credit file just as fast.
To establish a trade line, find creditors and lenders that report to the business credit reporting agencies. Many home improvement and building suppliers, such as ProBuild, offer credit accounts and report payment behavior. For the office-centered business, the Staples Commercial account reports to Dun & Bradstreet (one of the major business credit reporting agencies) even when the account was opened with a personal guarantee, so long as the business provides a DUNS number on the application.
Your bank might offer a business loan, but prior to the existence of a business credit file, the loan may need to be secured with collateral.
Good financial management is critical to operating any successful business. Separating your business finances from personal is a huge step in the right direction. Getting a business credit card offers several distinct advantages.
Build credibility
Presenting a vendor with a business credit card can make you look more professional and organized. Subtle non-verbal cues like this can have a positive overall effect on their perception of you and subsequently how you are treated.
Tax benefits
You should pay off your entire balance every month. But if you carry a balance the interest you pay on your business account is tax deductible.
Not all business cards are credit cards; some business cards are charge cards which means all charges made on the card are due and payable when you receive your periodic statement.
Budgeting and bookkeeping
Making all of your business purchases with the credit card helps you keep an accurate eye on the budget. You can give each authorized employee his or her own card and track exactly how it is used. You could also have improved cash flow and the opportunity to generate revenue before paying for certain supplies or other expenses. The credit card’s grace period effectively becomes an interest-free loan. Making all of your purchases on one account may also allow you to categorize and limit spending more easily than you could in a cash-based system.
Sign-up bonuses and rewards
Many business cards offer incentives to open and use the new approved account within a set time from opening the account to earn a one-time bonus after spending requirements are met. Some business cards offer ongoing rewards. For example, certain business cards may offer rewards for specific qualifying purchases such as: office supplies and cellular phone, internet, landline and cable t.v. service. Depending on the program, rewards might be redeemable for cash, a statement credit, travel, upgrades, merchandise or other items.
Purchase protection
Like personal credit cards, business cards often come with a certain amount of protection and free insurance for purchases made using the card. For example, most major business cards offer auto rental collision damage waivers. Others offer price guarantees on qualifying purchases made with the card.
Different laws apply to business credit cards
A word of caution: federal law does not give the same protections to business credit cards as it does to consumer credit cards. The CARD Act of 2009 applies to consumers, not businesses. For example, the CARD Act stipulates that on consumer cards, the due date must be the same each month. Business cards, on the other hand, often have a rolling 30-day cycle, which means the due date moves up one day most months. Also, on consumer cards the payment above the required minimum must be applied to the portion of the balance with the highest interest rate. On business cards, the issuer may apply extra payments to the balance with the lowest rate. These are not the only consumer protections that do not apply to business credit card holders.
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