The problem with using existing personal credit cards is that you will never establish business credit with them. On top of that, you load up your personal debt-to-income ratio with expenses of a business nature. Then, if you need a personal loan for a home, automobile, or other emergencies, you may not be able to get it. Another problem is that using personal credit in the business increases the risk that your personal assets are put at risk for business liabilities.
Personal credit card companies report to the usual personal credit agencies, but that won’t help your business. Business credit reporting agencies are separate even when conducted by the same company, such as Equifax. One of the biggest business credit reporting companies isn’t affiliated with a personal credit reporting agency. That’s Dunn & Bradstreet, and if your business isn’t showing up on their list, it won’t get any attention from lenders when you are looking for a loan later on. The bottom line is that you will eventually have to get all the documentation for your business. It’s better to take the time to do it right at the beginning and create business credit simultaneously.
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>> RELATED: How to Get Business Funding Without a Personal Guarantee
Eliminating Personal Guarantees
Since the idea is to separate your business credit from your personal credit, it’s preferable not to need to use your personal credit to back a business credit card application. Some credit card companies require a business to have a certain number of employees, usually more than 5 and have been in business for more than two years before they will consider an application solely based on the business’s reputation.
Extra Benefits of Using Business Credit Cards to Build Business Credit
Along with helping you build proof of business fundability, using business credit cards helps you organize your business better. They give you monthly reports of expenses, and you can dedicate specific cards to certain purposes. That is a great help for bookkeeping, and you can also take advantage of different business credit card rewards to save money on everything from airfare to gasoline.
What to Watch Out For When Choosing a Business Credit Card
Read the fine print carefully. Business credit cards do not have the same restrictions as personal credit cards. Ensure the rates are understandable and know if they can change without notice. Beware of some business credit cards that can change their rates in retrospect. That can end up costing you a lot of money.
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>> RELATED: How to Build Business Credit
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Pay attention to when each card expects payments and ensure the due dates do not fluctuate. For many businesses, a due date that can change, even a few days from month to month, can wreak havoc on their accounting system. Some businesses may consider unrestricted over-the-limit fees a bonus as they do not have to worry about being able to charge important equipment or services for their business even if they are at their limit or over it.
However, fees that are over the limit can drown you fast. It’s better to ensure your chosen card has a set limit and decline overage insurance or protection. It will cost you more than learning to control your spending in the long run.
Tried everything and still can’t get a business credit card
The hill can seem steep, especially for business owners just starting out with no proven track record or business credit to rely on. The thought of using secured credit cards to build your business credit when you can’t get an unsecured card may enter your mind. In personal credit circles, secured credit cards require you to have money in an account that you can “borrow” against.
You are effectively just using your money to make purchases, and yes, you have to pay interest on using your money with a secured credit card. Still, you will also be building credit when you make payments regularly. The problem with looking for secured business credit cards is that they aren’t readily available. Banks don’t offer secured cards to businesses because they aren’t profitable enough, and most business owners can find better ways to build their credit than by using secured cards.
Finding Business Credit Cards
The Internet is an excellent resource for finding business credit cards. Search for business credit, and you will find dozens of possibilities. Apply at your local stores where you normally purchase supplies. You don’t need a high limit to start, and you will build credit for your business every month. Your favorite gas stations are another good resource for business credit cards.
If you have a problem getting business credit cards without using your personal credit as a backup, add your DUNS (Dun & Bradstreet Number) to your account. That will make sure that credit is reported to their agency and boost your business’s fundability at the same time. However, ask if the credit company will report to Dunn & Bradstreet; some cards do not. American Express is a major credit card that does not report to D&B for positive credit information. They will, however, report negative credit information, so make sure you always keep your account in good standing no matter what card you choose.
FAQ on Business Credit Cards
What is business credit, and why is it important?
Business credit refers to a company’s creditworthiness, similar to personal credit for individuals. Building business credit is crucial for establishing a separate credit profile for your business, which can help secure financing, negotiate better terms with suppliers, and protect personal credit. It also enhances your business’s credibility and financial stability.
How can I use business credit cards to build business credit?
Business credit cards offer a convenient and accessible way to establish and build business credit. By using them responsibly, making timely payments, and keeping credit utilization low, you can demonstrate creditworthiness to lenders and credit bureaus.
What factors affect business credit scores?
Similar to personal credit scores, factors such as payment history, credit utilization, length of credit history, and types of credit accounts impact business credit scores. Maintaining positive payment habits and managing credit responsibly are key to building and maintaining a strong business credit profile.
How should business owners choose the right business credit card?
When selecting a business credit card, consider factors such as interest rates, annual fees, rewards programs, and benefits tailored to your business’s needs. Look for cards that report to business credit bureaus and offer features conducive to building credit.
Can using personal credit cards impact business credit?
While personal credit cards can be used for business expenses, they typically don’t contribute to building business credit. To establish a separate business credit profile, it’s advisable to use dedicated business credit cards that report activity to business credit bureaus.
How can business owners monitor and manage their business credit?
Business owners can monitor their business credit by regularly reviewing credit reports from major business credit bureaus such as Dun & Bradstreet, Experian, and Equifax. Monitoring tools and credit monitoring services can help detect errors or unauthorized activity and take corrective actions promptly.
What are some common mistakes to avoid when using business credit cards to build credit?
Common mistakes include maxing out credit limits, making late payments, mixing personal and business expenses, and neglecting to monitor credit reports regularly. Avoiding these pitfalls and practicing responsible credit management is essential for building and maintaining strong business credit.
How long does it take to build business credit using credit cards?
Building business credit is a gradual process that requires consistent and responsible credit management over time. While there’s no fixed timeline, diligent use of business credit cards and timely payments can significantly improve business credit scores within several months to a few years.
What are the benefits of having good business credit?
Good business credit offers better financing options, lower interest rates, higher credit limits, and improved supplier terms. It also enhances your business’s reputation, credibility, and ability to seize growth opportunities.
How can business owners recover from negative credit history or low credit scores?
Business owners can improve their credit by paying off outstanding debts, disputing errors on credit reports, and implementing responsible credit management practices moving forward. Seeking professional guidance from credit counselors or financial advisors can also be beneficial in rebuilding credit.
Originally published on January 23, 2016. Updated on March 24, 2024
