How to Choose the Best Business Credit Card

A credit card in the foreground is held by a merchant who is on the phone.

How to Choose the Best Business Credit Card

Managing cash flow effectively is one of the biggest challenges any entrepreneur will face. To alleviate the pressure that often comes with tackling financial obstacles, many business owners turn to business credit cards to keep their head above water.

When you start exploring options for your company’s first business credit card, you face dozens of choices. Because there’s a difference between a personal credit card and a small business credit card, there are some specific things to consider.

In this guide, we will walk you through choosing the best business credit card for your business. We will also talk about qualifications, requirements, and reminders. Finally, we’ll discuss some alternative sources of funds, should you decide that a business credit card is not the right choice for your needs.

Common Business Credit Card Terms Defined

Here are some of the most common terms you’ll need to know as you research and compare business credit cards.

Annual fee – Credit card companies typically charge annual fees for each year you use their credit card. The fee is separate from interest rates on purchases. Annual fees typically range from $25 to $550. According to a study on credit card annual fees, the average is $147. [1]

Annual Percentage Rate (APR) – The annual percentage rate (APR) is the interest rate charged on your credit card balance. The rate is applied each month for as long you have an outstanding balance.

Balance transfer – If you’re looking for a lower interest rate, you can transfer your outstanding balance of one credit card to another credit card. Credit card companies refer to this as a “balance transfer.”

Credit Limit – Your credit limit is the amount of money you can charge to a credit card.

Credit Score – Your credit score is the 3-digit number that relates to how likely you are to repay your debt. This numerical expression represents your creditworthiness. The higher the credit score, the better.

Dispute – if you believe your credit card issuer has made a mistake with your bill, you can notify the credit card issuer and dispute the charges you think have been made in error.

FICO – FICO stands for Fair Isaac Corporation. It is the largest company that provides software to calculate a person’s credit score. Your credit score will often be referred to as FICO score.

Grace period – The grace period is a specified time that allows you to pay your credit card bill without paying interest rate or late fees.

Interest rate – The interest rate is the percentage that lenders apply to the balance you owe. For credit cards, multiple interest rates are applied depending on the situation. For example, the interest rate on your outstanding balance will be different in you have penalty rates if you pay late.

Business Credit Card Benefits

Having reliable business credit cards means having access to funds in case of emergencies. Credit cards also allow you to streamline your business spending and keep personal purchases separate. Not mixing up personal and businesses spending then makes it easier for you when tax season rolls around.

The success of your business often depends on how well you keep your records organized. When it’s time for you to file your tax returns separate receipts for your personal and business purchases will help avoid confusion, saving you time.

Also, remember that because your business credit card is used entirely for business purchases, the interest is tax-deductible. This is why it’s important not to use your business credit card for personal purchases; otherwise, things could get messy when it comes time to calculate the correct amounts of deductible interest.

Will a business credit card help build business credit?

Yes. A good way to build business credit is by using a business credit card; and when you pay your business credit card bills on time, the better your business credit score. Business credit is good to have because it impacts how much you pay for business insurance; it also improves your ability to qualify for credit lines and loans.

What are credit card utilization ratios? Do they affect my business credit line?

Your business credit card will work the same as your personal credit card. When you don’t pay your personal credit card bills on time, it impacts your personal credit score. The same happens when you’re late paying your business credit card bills; your business credit score suffers. However, there’s more at play in determining your business credit score than just paying your bills on time.

Credit utilization ratios play a significant role in how your credit score is calculated. Your credit utilization ratio is measured by how much you owe on your business credit card in comparison to the credit card’s limit. For example, if you have a credit limit of $20,000 but have an outstanding balance of $10,000, then your current credit card utilization ratio is 50%.

When banks and other lending firms decide if they should extend credit to your business, they take factors like credit utilization ratios and your credit card limit into consideration. Above a certain point, the higher your credit utilization ratio, the lower your chances of getting approved for a credit line. If you want to improve your chances of getting approved for a business loan, the recommendation by experts is to keep your credit utilization ratio low.

Why?

Your FICO score matters when you apply for a loan; it’s one the things banks and other loaning companies look at to determine if they should extend you credit. FICO is made up of:

35%: payment history
30%: amounts owed which includes debt to limit ratio; otherwise known as credit utilization ratio
15%: length of credit history
10%: credit mix or other types or other types of credit
10%: new credit

Because credit utilization ratio makes up 30% of your FICO score [2], you can see how much it affects your FICO score and, therefore, your creditworthiness.

Determine the credit card criteria that defines your needs

Apart from the many lenders and credit card issuers you can choose from; you’ll face the decision of which of their credit card products are best for your needs. Here are some questions to ask yourself:

Do I want to pay my card off every month or carry a balance?
What rewards do I want?
Should I consolidate my debts and transfer a balance?

Carry a Balance

When you “carry a balance,” you’ve used a portion of your pre-approved credit to make purchases. To carry a balance means to maintain it from month to month, as opposed to paying it off completely at the end of each month. Carrying a balance does not hurt your credit scores; do note that carrying a balance means you carry debt.

You have three options for paying your credit card bill. You can pay the minimum amount due, and your credit report will reflect that you paid on time, not hurting your credit score. However, this option hurts you in the long run because your outstanding balance starts to collect interest. The second option is to pay the balance; this strategy leaves everyone happy. The last option is to pay as you go. You can do this by immediately paying the amount you’ve just charged to your account without waiting for your bill to arrive.

The decision boils down to your cash flow and how much you can afford to pay towards your balance every month. If you can’t pay the total amount due every month and carry a balance, you should know the APR that applies to your balance. Some cards offer an introductory APR; however, these expire after a defined number of months. For obvious reasons, your top priority would then be a low annual percentage rate.

Credit Card Rewards

Specific credit cards offer rewards such as purchase, office supplies, cash-back, or travel. There are even credit card issuers who waive your annual fees if you qualify. Business credit cards also tend to have more attractive perks and rewards than personal credit cards.

Some credit card issuers also offer an incentive just for signing up; this is called a sign-up bonus and usually involves spending a certain amount of money within a specified time frame. The incentives can come in the form of cash back, airlines miles, reward points, or even free nights at one of their partner hotels.

Think about whether cash back rewards are better for you or if your company benefits more from points. If your company has high monthly expenditures in travel expenses such as flights, hotel rooms, or car rentals, it makes sense to choose a travel rewards card. And if your business is loyal to a particular airline or hotel, you may consider a co-branded card that will help you rack up rewards faster.

However, you’ll find cash back rewards more beneficial than travel rewards if your business is the type that deals with a lot of inventory; this is the case with retail establishments or restaurants.

Some credit cards offer purchase rewards that go to gas and grocery stores. And if your credit card pays a specified cash-back percentage on all your purchases, you’re essentially earning every time you use your card to pay for something. Rewards credit cards are best for businesses who decide not to carry a balance as rewards credit cards tend to have higher APRs.

Balance Transfer Credit Card

A balance transfer credit card is a powerful tool to help business owners avoid the APR after the introductory period. And it's suitable for those with debt balances and incoming invoices that haven't been paid yet.

As long as there aren’t any problems with your personal credit card profile, you can move your personal balance to a business card. Many credit card providers offer a promotional 0% interest rate balance transfer which you should take advantage of if you are confident you can repay your debt within the promotional period. If not, some offer a reduced interest rate instead.

Whether you choose the reduced interest rate or promotional 0% rate, remember that there is still a balance transfer fee to be paid. The bank or credit card company will charge a balance transfer fee of between 3% and 5% of the total credit card balance being transferred. [3]

A balance transfer is especially helpful if you need to consolidate existing debts. If you’re struggling with repaying existing credit card debts, you can transfer them all to a single balance transfer credit card, making it easier for you to track all your debts. With all your debts consolidated, repayment should be easier as you no longer owe separate amounts to different accounts that each charge their own high-interest rates.

Credit Card Qualifications and Criteria for Business Credit Card

Most credit card issuers allow you apply for a business credit card entirely online. When you apply for your first business credit card, the credit card company will base it on your personal credit. However, in some cases, you can include your business revenue with your personal income.

If you don’t qualify for a personal credit card, you most likely will not be approved for a business credit card either. For obvious reasons, you want to apply for a card you will most likely get approved for. Credit scores are a factor in helping card issuers determine if they should offer you a card.

So, know your scores. It’s a good idea to apply for the cards you think you have a higher chance of getting approved for to avoid hurting your scores in the event of too many hard credit inquiries.

Want to learn more about you business credit score? Learn more in our guide to business credit scores.

Hard Inquiry vs. Soft Inquiry

A hard inquiry or a “hard pull” occurs when borrowers give lenders or credit card issuers authority to check their credit when making a lending decision. Hard inquiries will show the lender if you’ve applied elsewhere for credit such as a car loan or mortgage.

You will likely be considered a high-risk customer when multiple hard inquiries take place in a short period of time. This would happen if you applied for multiple cards or loans simultaneously. Whether or not it’s really the case, this behavior sends signals to lenders that you’re desperate for cash. While you might think you’re covering more ground by applying for a business card with many lenders, you’re actually hurting your chances.

A soft inquiry is also known as “soft pull.” It doesn’t affect your credit score. They typically occur when a lender who wants to offer you a card needs to check your credit or when an employer runs a soft inquiry before hiring you.

Remember, your credit score plays a significant role in your financial wellbeing and ability to get approved for a credit card. You may want to spread out your credit card applications to avoid hurting your score with multiple hard inquiries.

Each bank has their own minimum credit score requirement. For major banks and credit card issuers, a FICO score of 750 or higher is considered excellent credit quality and means approval odds are very good; anything under 600 is generally considered poor. [4] However, even with a credit score of 600 and under, there are still credit card companies that may approve you.

Alternatives to Business Credit Cards

The average APR for business cards is between 13.12% and 19.87%. [5] Consider yourself lucky if you qualify for the lowest interest rate; however, getting stuck with the highest interest rate could really hurt your business especially if your cash flow means carrying a significant balance month to month.

If you’re issuing them to your employees, spending might go unchecked. There’s also the potential for the lender to impose higher interest rates on late payments. Having a business credit card means always being on high alert on usage, timely payments, and monitoring your cash flow to ensure you have at least enough to cover the minimum amount due.

If you’re applying for a business credit card because you need access to funds in case of business-related emergencies, there are alternatives to business credit cards. Here are some other options to consider if you feel that a business credit card does not meet your business needs:

Traditional Term Loans

Term loans are a type of small business financing where you get a lump sum of cash and make regular payments to your lender until the loan is paid off. Short-term loans are typically between 3 and 18 months and are great for your business’s immediate needs. However, because they’re released quickly, they tend to be more expensive compared to other types of financing.

Medium-term loans are traditional term loans that have longer term lengths and can last between 1 and 5 years. Longer term loans are reserved for established businesses who have proven stability to pay back comparatively bigger loan amounts over a longer period of time.

Small Business Administration

SBA loans are small business loans issued by participating lenders of the Small Business Administration. They are federally guaranteed term loans available to small businesses who need funds for working capital, equipment purchase, and expansion.

The downside of an SBA loan is that it requires a personal guarantee from every owner, putting you and your personal assets at risk if you cannot make your payments. SBA loans typically have higher interest rates than traditional bank loans. [6] They also require a lot of paperwork and documentation. Finally, they require that you have good credit. If you’re a start-up or haven’t been in business for very long, SBA loans might not be the best option as they usually only consider companies with an established credit history.

Merchant Cash Advances

With a merchant cash advance (MCA), you get a lump sum of cash. To pay it back, you dedicate a fixed percentage of your daily credit card receipts to the repayment. An MCA is considered a short-term financing option as the terms are typically under 2 years. This type of financing offers quick fixes to companies who need access to funds immediately. The downside is that because they’re not recognized by the law as a loan, they’re not regulated. This explains why some lenders impose APR rates that are between 80% and 120%. [7]

Considering a Merchant Cash Advance? Check out our definitive guide to MCAs for Business Owners.

Business Lines of Credit

Lines of credit are similar to credit cards. You’re given access to funds and draw from it whenever you need. You only pay interest on the funds you take out and use. As you repay the lender, the pool of funds refills. This type of small business financing gives you the flexibility you wouldn’t get with term loans.

When it comes to business lines of credit, Fundbox is changing the way small businesses get access to capital. With Fundbox, you can sign up in seconds, get a credit decision in just 3 minutes*, and if approved, get your funds transferred to your business bank account as soon as the next business day. If you repay early, you can even save, since we waive all remaining fees on early repayments.

In conclusion, business credit cards are a great way to get flexible access to funds when you need them for your business. However, they are just one of the many tools you have available to you. Keep in mind other alternatives (like a line of credit) for when you need more funds at the ready.

*Based on the median credit decision time for Fundbox customers.

Sources: