Launching your own small business is fun with a ton of decisions some tiny, some enormous. Among the first financial issues that most novice entrepreneurs have is, Should I apply a business credit card when already starting out?
As a U.S. citizen who may be considering starting or have already, started a small business or startup, it is important to know how a Business Credit Card can make a difference. In this post, I shall take you through the advantages and the disadvantages, the value it can hold on startups, and make you decide whether it is a move worth taking or not.
Business credit card explained
Business credit card is a financial product that deals with business cards only. Unlike a consumer credit card, it provides options to facilitate budget tracking, control over employee cards, greater spending authority and occasionally business-specific rewards.
Business credit cards are offered to:
- Sole proprietors
- Freelancers
- LLCs and corporations
- Startups (including pre-revenue)
Yes, you do not have to be a complete, revenue generating company to be able to apply, you can even take part as your business is just new.
Why Would a New Company or a Small Company, Want a Business Credit Card?
Getting into business is an experience that entails purchasing supplies, software, marketing services and others. It is common that most start-up entrepreneurs will finance the start-up costs using personal finances. Business credit card is something that can:
- Keep personal/enterprise funds distinct
- Lift your business credit rating
- Provide short term cash flows solutions
- Get rewarded or cashback
- Make capital available (without a loan)
However, is it the decision that suits you?
Divide this up.
Advantages of a Business Credit Sky of a New Entrepreneur Run
1. Business and Personal Finance Separation
Having a separate nature of spending is one of the most significant reasons to obtain a business credit card. This makes tax time so much simpler and assists in keeping your personal finances intact should your business ever be audited or go through some form of legal confrontation.
Hint: To keep proper records, the IRS advises people to have separate accounts to take care of personal and business monies.
2. Establishes Business Credit
In the way your own credit score is built, so, too, can your own business build a personal credit. So long as you maintain a business credit card (paying on time and maintaining boring low balances… especially low), you should be able to generate good business credit.
This is essential in the event that you intend to:
- Borrow business loans
- Rent office
- Communicate with vendors that verify business credit
3. Capital Access Early Stages
Not all of the startups qualify to receive traditional business loans at the beginning. A credit card may offer such a form of revolving credit to meet upfront business expenses such as:
- Website development
- Office supplies
- Business software
- Marketing campaigns
It is one means to finance your startup without the cost of equity and without banks.
4. Rewards/ Perks
Business rewards: Rewards on business cards can be geared specifically towards an entrepreneur, including:
- Advertisement and office materials cashback
- Travel incentives (suitable when working with start ups with a dispersed team or having conferences)
- Software with expenses tracking
- Employee free cards
These rewards may assist you in making your dollar go further and this will be especially true in the initial months since every penny makes a huge difference.
5. Fraud Alerts and purchase Protection
Most of the cards provide purchase protection and sophisticated fraud detection. That is a cushion of financial protection which you do not necessarily have with a debit card or cash payments.
Disadvantages of Obtaining Business Credit Card as a Business Start-Up
On the one hand, it is associated with numerous advantages, whereas on the other hand, it has certain disadvantages and pitfalls to be taken into consideration.
1. Personal Guarantee Needed
The majority of business credit cards demand personal guarantee particularly to startups making minimal or zero revenue. This implies that in case your business collapses or is unable to make payment to the card you take the debt as a personal obligation.
When you become behind, it can influence the personal credit rating.
2. Interest Rates are High
Business credit cards may possess much high interest probabilities than custom provisions of loans. Failure to settle your balance in full at the end of the month might end up costing you dearly by paying huge interest that cuts your cash flow.
Hint: You should target a credit card only when you are sure that you can settle the balance amount in a short period.
3. Be Permissive to Overspending
Access to credit may allure new business people to wander more than they should – particularly in initial years when euphoria is on. This may cause a debt issue even before the business establishes a footing.
4. Poor Consumer Protection
The U.S. laws that provide protections to the personal cards do not apply to business credit cards. Such as, some CARD Act protections (such as limits on interest rates and grace periods) do not apply.
And it is even more reason why this should be read between the lines before enrolling.
The thing that Startups Need to Know Prior to Applying
In the case of starting a business, the following are tips on starting a business particular to the American citizen:
1. You Ar not required to have an LLC to Obtain a Card
Sole proprietors can apply in their own names with Social Security Number (SSN). You can simply fill in your actual name as the name if the business when you have not established a company.
2. Account of all Income Sources
Not all your business has to be making money yet at this point, and most card applications allow you to enter any other personal income(such as a job or freelance work) during the application process. This qualifies you.
3. Get the Appropriate Kind of Card
Top business credit cards to consider when one is starting a business include the following:
- Chase Ink Business Unlimited lastly- flat 1.5% cashback
- American Express Blue Business® Plus 2 points/purchase, up to a cap
- Capital one spark series- suitable in terms of flat-rate rewards of travel
Both offer various incentives and you should compare the fees, interest rates, and benefits available.
4. Start Small
Your limit may be $10,000 but this does not mean that you should spend that much. Develop credit gradually and make necessary, not a high-risk purchase using the card.
Thus, the question is, Should You?
Now what about the big question:
✅You should think about purchasing business credit card when:
- You desire to segregate personal and business banking account
- You require assistance in dealing with cash flow
- You are sure that you can make repayment
- You want to establish business credit in the early days
❌You may be on stand-by when:
- You lack a business plan and budgetary view Industrious cannot help.
- You are already assuming your own credit card debt
- Overspending is likely to occur in you
Final Thoughts
A business credit card may become an effective instrument of the owner entrepreneurs- (particularly, at the initial stages of a start-up). It can also enable you to manage money, build credit and earn rewards. However, as is the case with any financial product, there must be prudence of use.
Before registering to a small business, consider signing up should be conducted by thinking about your financial habits, business goals, and re-paying capability especially when starting up a small business in U.S. A card can offer you flexibility- but only when you use it wisely.
Like with any other important business decision, read about it, compare, and do not hesitate to seek financial counselling or auditing help.
Disclaimer:
Information provided in this blog is not financial advice and will not be furnished. Before making a financial decision, please discuss the decision with a trained advisor.
Also Read: Government Jobs vs Private Jobs: Which One’s Right for You?
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