What is a Business Credit Card
How it Works & Key Things to Know
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Business Credit Card
A business credit card is a useful tool, used to manage and maintain a company's cash flow. Equipped with higher limits than personal cards, a business credit card can be used to clear payroll, buy supplies or pay for an unforeseen situation. After the business revenue comes in, the cardholder then pays the borrowed balance. Further, a business credit card may also offer rewards and streamline bookkeeping, depending on the lender and the applicant's eligibility.
However, choosing the wrong business credit card is easier than the right one, especially when it comes to picking the best small business credit cards. It may lead to adverse outcomes, including piling business debt, missed rewards, negative impact on credit scores, and difficulty managing expenses. So, this page details types of business credit cards, their pros and cons, tips to improve approval chances, mistakes to avoid and FAQs.
What is a Business Credit Card? Why Do Small Businesses Need It?
A business credit card works just like a personal credit card. But it is made especially for company transactions. Using a business credit card commonly helps segregate business and personal spendings, reducing stress when it comes to filing taxes and protecting credit profiles. These cards also offer access to a revolving credit limit, when needed.
Small businesses need business credit cards primarily for improved financial management, access to flexible funding, and building a business credit history. Responsible use of a business credit card builds a solid credit score, that can unlock higher limits, better rates, or cashback bonuses. As per Visa U.S. Small Business Pulse report, approximately 73% cardholders use their rewards or cashback for business purposes. 79% of small businesses use credit cards (consumer or business) to make payments.
Types of Business Credit Cards
In the United States, business credit cards are typically categorized based on reward structure, payment terms, and intended business size. The main types include cash back cards, travel rewards cards, general points-earning cards and charge cards. Selecting the best business credit cards for small business requires comparing rewards, fees, and credit limits. Here are the primary types of business credit cards that are available:
Cash Back Cards
These cards reward the cardholder with a percentage of their spending as cashback.
Flat-rate Cash Back Cards
These offer the same percentage back on all purchases, simplifying reward tracking.
Tiered or Category Cash Back Cards
These provide higher percentages in specific spending categories (e.g., office supplies, gas, dining) that may be chosen or that rotate quarterly.
Travel Rewards Cards
These are ideal if the business involves frequent travel. These cards allow the cardholder to earn miles or points, that can be redeemed for flights, hotel stays, and other travel expenses.
General Points-Earning Cards
These cards offer flexible points that can be redeemed for a variety of options, including travel, cash back, gift cards, or statement credits, often through a specific issuer's rewards program.
Charge Cards
Unlike traditional credit cards, charge cards generally require you to pay the full balance in full every month and typically have no preset spending limit. These are often suitable for larger companies with high cash flow.
Secured Business Credit Cards
These cards are designed for small business owners with limited or poor credit history. They require a security deposit, which acts as the credit limit, helping the business build a positive credit history over time.
Cards for Startups/Corporate Cards
Newer financial technology companies offer corporate cards, that focus heavily on expense management software, high credit limits and controls for employee spending.
Who May Get a Business Credit Card?
In the U.S., a wide range of individuals and entities can qualify for a business credit card. Nonetheless, the eligibility criteria include the establishment of a legitimate business and meeting specific financial and legal requirements.
Eligible Applicants
Applicants do not need to be a large corporation to qualify; even early-stage businesses and independent contractors are often permitted. Eligible business structures include:
- Sole proprietors
- LLCs, Corporations, and Partnerships
- Startups and small businesses
General Requirements
Most business credit card issuers require both personal and business details to assess risk. These typical requirements include:
- Sharing personal and business information, including legal names, address(es), SSN (or ITIN) and business structure (e.g., sole proprietorship, LLC).
- Showcasing a good to excellent credit score for the best terms and rewards.
- Putting down a personal guarantee, making the business owner personally liable for the debt, if the business cannot pay.
- Mentioning industry type and time in business alongside tax identification number (EIN or SSN).
- Detailing accurate annual business revenue and average monthly expenses.
- Showing lenders the evidence of a stable, operational business, which can include consistent cash flow, a business bank account, and sometimes recent bank statements or tax returns.
Corporate Cards vs Small Business Credit Cards
| Small Business Credit Cards | Corporate Credit Cards |
|---|---|
| Accessible to a wide range of applicants, including startups. | Typically kept aside for large, established businesses with hefty annual revenue and strong finances. |
| Approval often depends on a personal credit check and a personal guarantee. | Approval is based on the business's financials, and they usually do not require a personal credit check or guarantee. |
| Credit limits are generally lower and set upon approval. | Often offer very high or no preset spending limits. |
The requirements differ significantly, depending on the type of card.
Pros and Cons of a Business Credit Card
Just like business loans, business credit cards also come with their own set of benefits and drawbacks. A business credit card offers benefits such as building business credit, simplifying expense tracking, and earning reward points as well as perks. But on the other hand, it also presents drawbacks, such as higher interest rates, potential personal liability, and fewer consumer protections compared to personal cards. Here is a list of common pros and cons to know, before applying for a business credit card:
Pros:
Build Company Score
Using the card and paying on time helps make a special company score. A good score helps the company get bigger loans later.
Simple Tracking
The card keeps a list of everything the company buys. This makes it simple to count money for taxes.
Quick Money
It gives the company fast, extra money for small things or sudden needs.
Keep Money Separate
It helps keep the boss's personal money safe and separate from the company's money.
Staff Cards
The boss can give cards to workers with set limits on how much they can spend.
Cons
Personal Liability
If the company cannot pay for the card, the business owner has to pay with their own personal money/assets.
High Cost
These cards often have a high interest fee. If the company does not pay the full bill, the cost gets heavy fast.
Spend Too Much
Since the money is simple to use, the company might buy too much and get into debt.
Hurt Company Score
Using too much of the card's limit can make the company score bad, which makes getting other loans hard.
Extra Fees
Some cards have hidden foreign transaction fees every year.
Using a Business Credit Card: Popular Practices
Getting approved for a business credit card is only the first step. Using the card responsibly is where the real test is because it can either make or break a business. Here's is a list of top practices, when it comes to using a new business credit card:
01 Maintain low credit utilization
Typically, keeping credit utilization below 30% is a widely recommended guideline by financial experts, to protect credit scores and uphold responsible use. High utilization may be perceived as a sign of financial stress to credit bureaus and future lenders.
02 Pay full amounts on time
Avoid interest by paying the full statement balance before the due date. Carrying balances reduces the effective value of rewards and creates a debt cycle that limits future cash flow.
03 Monitor real-time spending
If required, using expense tracking tools may help identify high expenses and stay within the set budget. Awaiting monthly statements may lead to unpleasant surprises later and limit the ability to correct errors in time. Real-time card monitoring also helps detect fraudulent activities before it is too late.
04 Review and apply for cards with rewards and cashbacks
Choose a business credit card that gives the most money back or points for the things the business buys most often.
05 Check expenses monthly/quarterly
Since purchase patterns may change seasonally, this ensures the current business credit card is aligned with the fund needs of the venture
Mistakes to Avoid: Business Credit Cards
To make use of a business credit card effectively and avoid financial pitfalls, business owners should steer clear of several common mistakes. The most frequent mistakes involve mixing personal and business finances, carrying high balances, and not setting clear spending policies. Here are the key mistakes to avoid with a business credit card:
Carrying a High Monthly Balance
Business credit cards often have high interest rates; carrying a balance from month to month means piles on the interest charges. This can quickly negate any rewards earned and trigger debt.
Using the Card for Long-Term Financing
Credit cards are best for short-term cash flow management or regular operational expenses. For large purchases that require months or years to pay off, a business loan or line of credit with a lower interest rate is generally a more cost-effective option.
Maxing Out Cards
Using too much of the available credit (a high credit utilization ratio) signals financial trouble to lenders and can hurt business credit scores.
Paying Bills Late
Late credit card payments can result in penalties, higher interest rates, and leave a negative impact on both business and personal credit scores. Set up automatic payments or alerts to ensure bills are paid on time.
Mixing Up Expenses
This is one of the most common yet critical errors. Mixing funds makes bookkeeping and tax preparation difficult. This may put the cardholder's personal assets at risk if the business is sued (known as "piercing the corporate veil" for LLCs or corporations).
Failing to Set Spending Limits
When issuing corporate cards to employees, a lack of clear guidelines and spending limits may lead to overspending or unauthorized use.
Business Credit Card: Beyond Business Needs
A business credit card is a specialized financing tool for companies to buy things and manage money better. For new groups, like those seeking business credit cards for new LLC, the goal is finding the best small business credit card to start a good company score. When getting the card, checking the variable APR is important because a high one means high costs, if the bill isn't paid fully before the next month. Before the account opening, a company should get ready by setting up a transparent business account.
A business credit card also brings operational benefits that go beyond simple rewards for eligible purchases and business spending. Companies can issue employee cards to their staff, helping the business owner keep track of every dollar spent and stay within budget during each billing cycle. For companies carrying debt on other cards, a balance transfer feature can be a smart move. It may allow them to move debt to the new card, often with a low or zero introductory interest rate for a few months. Finally, many of the best business credit cards offer large welcome offers, giving the business significant bonus points or cash back after spending a set amount in the first few months. This may be a viable way to earn instant value for planned, necessary expenditures. Ultimately, a smart company always aims to pay its bills on time to keep its credit score high, save money and envision long term growth.
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FAQs About Business Credit Card
1. What is a business credit card?
A business credit card is a payment card specifically for business owners and their employees, to manage business expenses. It helps separate personal and business finances, a step that is crucial for accounting and tax purposes.
2. Who is eligible to apply for a business credit card?
All business types, from sole proprietors and independent contractors to LLCs and corporations, are eligible to apply for a business credit card. Lenders typically check the business owner's personal credit score during the application process among other factors. However, it is best to strictly review all terms and compare lenders, before signing up for any business credit card, to avoid unpleasant surprises later.
3. Is an EIN (Employer Identification Number) required to apply?
To apply for a business credit card, an EIN is not always needed. Sole proprietors often use their personal Social Security Number (SSN). However, providing an EIN may help the credit card company establish a separate business credit profile.
4. What are the main benefits of a business credit card?
Using a business credit card comes with different benefits, including cashbacks and rewards. It keeps personal and business expenses separate, simplifies bookkeeping and tax preparation. Further, responsible use of a business credit card helps build a healthy credit score, which is important for future loans and financing.
5. Are there any business credit card risks?
Most business credit cards need a personal guarantee; meaning that the business owner is personally responsible for the debt if the business defaults. Further, a business credit card may not be covered by the same federal consumer protection laws as personal credit cards. A business credit card also often has a higher APR (Annual Percentage Rates) than personal cards or traditional small business loans.
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