Three things to know about business credit cards

By William Pirraglia
Posted in: Credit Cards, Personal Finance

Three things to know about business credit cards Business credit cards can be a very useful tool for small business owners and employees alike. There are many diverse benefits to using this type of credit card, most of which will become clear as you examine and compare business card offers.

Read on for three items that are extremely important to know and should not be overlooked when considering to apply for and use a business credit card.

1. Business credit cards differ from consumer credit cards.

Small business credit cards look much like consumer cards, but you will often find many differences worth noting. If your business is a sole proprietorship, a small general partnership, or even a small corporation, you typically won't notice any real difference. Your small business credit cards may operate almost exactly like your consumer cards.

However, there are implied differences that might be important to you. The most important is the ability to track your business spending and eliminate the potential confusion of mixing personal with business purchases. Credit cards for business offer a easy way to record your expenses to help reporting and tax issues.

In some cases, small business credit cards provide some extra "perks" as well. For instance, credit card companies may offer higher rewards (air miles, cash back, rebates, etc.). Another important reason to use business credit cards is to build a credit profile for your company.

Situations arise when you need to purchase supplies or inventory during tight cash periods. Your personal credit score is still important if you own a small business, but you'll want to separate your personal finances and business finances as much as possible. Keeping your personal and business affairs separate at all times can be critical.

2. Small business credit cards differ from corporate cards.

While many small business credit cards look and act much like consumer cards, corporate credit cards often operate differently. Consider these items:

Corporate cards often give you much more detailed spending reports than small business or consumer cards. These cards are specifically designed for larger corporations and can allow for tracking company spending in even greater detail. If used properly, these extra reports give you better control, recognition, and understanding of your operating expenses.

While personal and small business credit cards usually permit you to repay your balance over time, some corporate cards require that you pay off your outstanding balance every month. Most corporations pay all outstanding balances on a monthly basis anyway. They use credit cards more for tracking and recording expenses than for longer-term credit reasons.

Using corporate cards eliminates the need for a large petty cash fund and writing out expense reimbursement checks every month. Typically, corporations don't want to incur extra finance charges for monthly expenses, most of which will reoccur the next month anyway. Larger corporations like to use credit cards for business in thirty-day periods only.

Unlike consumer and small business credit cards, many corporate cards do have annual fees. There are at least two major reasons for this, neither of which is associated with any perceived "greed factor."

First, unlike consumer accounts, most corporate credit cards seldom carry "mature" balances – those amounts that remain outstanding for months. An annual fee can help offset this loss of income. Second, the detailed reports offered by many corporate cards may require extra cost (people, computer time, software, paper, etc.). An annual fee can help to offset this cost of this extra detailed information, as well.

Another difference is in the area of liability. Small business credit cards are issued in the personal name of the small business owner. That is, the business owner is required to supply personal financial information when applying for a small business credit card, and he/she will be responsible for repaying items charged to the card. Corporate cards, on the other hand, are typically issued in the name of the corporation, so the business itself will be liable for paying back charges, not an individual.

Related: Can I obtain a business credit card without being personally liable?

3. Using business credit cards can help at tax time.

Most experts would agree that the single most important benefit of business credit cards involves reporting and tax necessities. First, consider the importance and significance of the Internal Revenue Service (IRS). Should the IRS decide to conduct an audit of your business, having your expenses co-mingled with your personal charges can muddle the situation quite a bit.

Keeping your personal and business records correct and in distinct places can greatly improve your organization and the quality financial reports. Second, you'll often save money. Forcing your accountant or tax adviser to pour over combined personal and business records to separate the expenses takes time. And that time equals money out of your pocket.

If you are a less-than-diligent record keeper, then letting your business credit cards do much of the work for you becomes even more important.

Advice posted in: Credit Cards, Personal Finance
Originally posted on: Dec 14, 2009

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