It is important to follow best practices for business credit cards. There are many advantages to using a business credit card, including higher limits and greater rewards. When used responsibly, these accounts offer a flexible revolving line of credit for short-term financing. When misused, they can cause damage.

You might think the simplest method to build business credit is to start using a business credit card, but normally this is not true. Some business credit cards wind up on personal credit reports since they are typically personally guaranteed. While many may not show up on personal credit initially, it is a definite that it will be reported to personal credit if you default.

Credit Card Tips for Small or Midsized Business Owners

1. Avoid cash advances:

   Small business credit cards can be expensive with exorbitant interest rates and fees. Credit cards are convenient for regular expenses but should not be used for cash advances. When you’re in need of cash, using a business line of credit is the better option because usually do not have cash advance fees.

2. Be diligent with employee cards:

   Credit cards offer the convenience of closely monitoring charges, this way you can track employee expenses. Just make sure you’re managing how the card is being used.

3. Protect credit and finances:

   Most business credit cards require a personal guarantor. The guarantor is giving personal liability on any debts that go unpaid on the account. If the account goes delinquent the creditor will report to the guarantor’s personal credit and the business credit. Consider the damage that business credit cards can do to your finances and credit before signing personally.

4. Watch your personal purchases:

   Opening a business bank account and revolving account are crucial first steps to building business credit profiles, it’s best to keep your personal expenses separate from the business. Many credit card providers have a provision in their terms (whether they enforce it or not is debatable) that that says business credit cards should only be used for business expenses. Bank of America includes this clause on page one of their terms and conditions:

   

5. Use it as a tool to build credit:

   Business credit cards can be easier to qualify for than business loans or lines of credit. Especially if the applicant is a new business owner. If used properly the account can help establish business credit profiles and scores. Not all but many business credit cards report to Experian Business and/or Equifax business.

Few federal regulations to protect SMBs

There are few federal laws regulating business credit cards or protecting business owners. Business credit cards are excluded from the credit card act regulations – when congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, the business community was left out. This means that credit card providers can:

• Raise and fluctuate interest rates without notice.
• Raise interest on existing balances.
• Charge interest on debts that were paid on time.
• Offer less options to dispute billing errors.
• Set limits on return protection. For instance, they may cap number of returns you can do on the card each year and give a limited return window.

Although there have been attempts to reverse these unfair practices, SMB owners need to be diligent about reading the entire terms of the account before applying due to these hidden risks that business credit accounts come with.

Since protections are not offered through commercial credit cards and business owners typically have to offer a personal guarantee to open one, your commercial credit card can potentially destroy your personal credit rather than build your business credit. Too many business owners mix their business expenses with their personal finances; and while personal credit is still a factor when applying for a business loan, if your business has poor or no established credit you will either be denied or you may be able to procure a loan at a much higher cost.

Never apply for credit without knowing where you stand with the bureaus, check your credit scores. This requires checking both your business credit score and your personal credit score; different credit cards require different credit strength, never apply for a card that will not accept your score this will waste an inquiry on your report. If you see any inconsistencies in your business credit report and scores or notice that your business does not have developed credit – reach out to one of our Credit Experts for a free credit analysis.  We at North Shore Advisory, Inc. work with many small – mid size businesses to build, fix, and establish their credit through all business credit bureaus.