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Read This Before You Open a Credit Card for Your Business

The benefits don't always outweigh the risks...
Andrew Deen has been a consultant for startups in almost every industry from retail to medical devices and everything in between. He implements lean methodology and currently writing a book about scaling up business. Twitter @AndrewDeen14
Andrew Deen has been a consultant for startups in almost every industry from retail to medical devices and everything in between. He implements lean methodology and currently writing a book about scaling up business. Twitter @AndrewDeen14

Canon EOS 70d via Max Pixel

Credit cards are an essential part of our everyday life, but they come with their own set of challenges and risks. Even people who are good at managing debt can unintentionally harm their credit score by opening up too many accounts, using too much of their credit limit, and other seemingly harmless behavior. If you’re a business owner with business expenses, then it might make sense to open up a card just for your business. However, this step isn’t something you should take lightly. Here are some important tips to consider before you open a credit card for your business.

Understand the Differences in Protection

Reading the fine print on credit or loan agreements is always important, whether you’re applying for a business loan, getting into peer-to-peer lending, or opening a new card, but you may not be aware of the different protections offered to consumers over businesses. Business credit cards aren’t under the same kinds of guaranteed protections as consumer cards are, so your bank could easily leave out standard terms or switch interest rates without notice. However, many banks do offer the same standard terms as consumer cards, which is why it’s important to do your research and find a card with fair terms for your business.

You and Your Business’s Credit Rating

At first, you and your business’s credit rating may be one in the same. Why? Because if you’re opening up a credit line for the first time, and your business doesn’t have its own credit score yet, you may have to shoulder any debt personally if your business is unable to pay. You don’t want to personally pile up debt from your business, so in addition to looking at the terms of the agreement, consider how much risk there is that your business won’t be able to pay off credit card bills.

Getting a business credit card can be a great plan if you’re interested in building up your business’s credit score. If you want to apply for a small business loan in the future, having a good commercial credit score will make the process much easier. Some banks only report to commercial credit bureaus, while others sometimes report to consumer bureaus as well—an important consideration if your credit score is being used to guarantee that your business will repay.

Some business owners think they won’t be able to get a business credit card due to their own poor credit score. While this is sometimes true, your credit doesn’t have to be perfect to qualify for a card—especially if your business already has established credit.

Have a Debt Management Plan

You may never intend to go into debt, but the economy can change, your circumstances could change, and debt can pile up quickly if you’re not able to pay your bill off right away. Having a debt management plan before you get a business credit card can help you avoid paying out a lot of interest or hurting your credit score. Remi Trudel and his colleagues at Boston University studied what was the most efficient way to pay off debts from a psychological perspective. Over several studies, they found that participants worked about 15% harder to pay down their debt when they focused on one account at a time, instead of distributing their efforts across all accounts. Moreover, paying off the smallest balance first seemed to produce the most motivation to continue paying off debts. Focusing on paying off one account at a time, and focusing on smaller balances first are easy concepts anyone can apply, so if you find yourself with multiple balances, have that strategy in your back pocket.

Think About the Perks

When deciding which card to open, there are several factors to consider. Aside from terms, protections, and interest rates, many commercial credit cards offer higher limits and perks similar to those consumers get from normal credit cards. The cash back and other offers are tailored to businesses, and can be beneficial to your company. With that said, many of the cards with impressive perks come with high interest rates—so if you’re anticipating carrying a balance frequently, you may want to go for a lower interest rate over cash back. Ready for your business credit card? Research the options and find the one that’s right for you and your business.

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