Rob Goebel, Lana Kotioukova/CreditCards.com
Rob Goebel, Lana Kotioukova/CreditCards.com
Business credit cards can be a great way for small business owners to grow their companies and build credit. If they’re not used properly, however, they can do more than create a financial black hole. Since anyone can check a business credit score – unlike a personal one – a low score can make it difficult to secure loans, retain suppliers and attract customers. In other words, a business credit card – if misused – can ruin your business.
While the number of small-business credit card accounts is relatively small (almost 14 million in 2015, or fewer than 4 percent of the number of general credit cards in circulation, according to Mercator Advisory Group), they carry a disproportionate amount of revenue on them. Small-business credit cards account for $430 billion in spending, or about $1 in every $6 spent on general purpose cards.
To use your business credit card to build up your credit – instead of sinking it – avoid these 10 common mistakes:
Mistake No. 1
You assume your business card issuer will report your account activity to the commercial credit bureaus. That’s not always the case. Many business card issuers report only to consumer credit bureaus, not commercial ones. (The three major commercial credit bureaus are Dun & Bradstreet, Experian and Equifax). Marco Carbajo, founder of Business Credit Insiders Circle, says make sure you ask – or investigate online – which issuers report to commercial credit bureaus. Carbajo also blogs about business credit for the Small Business Administration.
Mistake No. 2
You fail to register your business as a legal entity, such as a limited liability corporation (LLC). If you don’t register your business as a legal entity – and make sure that the credit card is issued to the business – you won’t be building up business credit, says Rod Griffin, Experian’s director of credit education.
Mistake No. 3
Maxing out your business card’s credit line. “You should never exceed a 30 percent utilization rate on personal or business credit cards,” Griffin says.
Mistake No. 4
Being late with your business credit card payment. As with a consumer credit account, late or missed payments will lower your business credit score. According to an Experian study, this is a mistake few businesses are making. Only 1.1 percent of small-business owners have at least one severely delinquent business credit account, and 6.8 percent have at least one severely delinquent consumer account.
You use a business credit card for working capital. Nick Braun, who runs a website that compares pet insurance plans, says he used his credit card to pay for marketing. “I thought I was smart, spending $1 and getting 2 percent cash back, but I wasn’t making enough to pay off my card in full,” he says. “So I was paying $1,200 in interest a month.” That's a common mistake, says Javier Marin, assistant director of the Small Business Development Center at the University of South Florida. “You should only use a credit card for something you can pay for within 30 days,” Marin says.
Mistake No. 6
Not understanding the best way to use different types of loans and lines of credit. A line of credit gives your business a certain amount of money – say $100,000 – but you are charged interest only on the amount borrowed. With a regular business loan, you borrow an amount over a fixed period of time and then repay it. Lines of credit and loans typically charge much lower interest rates than credit cards, and Marin advises that loans should be used for larger purchases and long-term investments. Lines of credit, he says, should be used for cash-flow needs. Credit cards, he adds, are best for short-term needs and small purchases.
Mistake No. 7
You apply for too many credit cards. Every time you apply for a credit card, it triggers a hard inquiry with the credit bureaus. While new inquiries typically have only a small, temporary impact on a credit score, if you apply for too many credit cards, it can set off warning bells that you or your business is struggling financially. Every inquiry represents a potential new debt, Griffin said. If a person is having difficulty managing existing debt, two or three inquiries “could affect future lending decisions.” he says.
Mistake No. 8
You fail to check your business credit profile on a regular basis – annually at a minimum. You don’t get free business credit reports yearly, as with your personal credit profile, but checking that credit report is crucial to clearing up any mistakes. The price of a business credit report depends on the level of detail included, Griffin saiys, and the best way to check your business credit profile is to access your reports at Dun & Bradstreet, Equifax and Experian.
Mistake No. 9
You hand out credit cards to employees without proper controls. One rogue employee can ruin your business credit. Controls, though, can limit how much can be spent, where the cards are used – such as only at gas stations – as well as what times of day, Carbajo says. Pamela Codispoti, president of Chase Branded Cards, notes that giving business credit cards to workers instead of having them use their personal credit cards can make bookkeeping easier for your business. But employees with business credit cards “need to be monitored on a regular basis,” she says.
Mistake No. 10
Fail to compare or use the types of rewards you can get with a business card. While this might not directly impact your credit score, the cash back or the miles you earn can save you a chunk of money. According to the May 2016 Capital One Spark Business Barometer, just 29 percent of small-business owners who have a credit card use the rewards to pay a business expense. And just 1 in 10 use rewards to help their business's bottom line.
Finally, as Carbajo says, you should use your business credit card to make your business's everyday purchases easier, not to keep your company afloat. Your business credit card should be “a convenience, not a necessity.”