But in chapter 2, let’s investigate business plastic…
Chapter 2
Business Credit Cards
Grayson Bell comes from an entrepreneurial family, and after seeing his parents and brother succeed in their ventures, he decided to launch his own business while still in college. He already had two personal credit cards, and had started to fall into the trap of paying only the minimum payment after an expensive car repair had left him owing more than he could repay in a month. His hope was that his business could help him pay down his credit card debt.
After some careful research, he decided to start an online electronics store. And to fund it he turned to credit cards. As he describes it on his website, DebtRoundUp.com:
“One factor of marketing that I learned really quick is that it costs money to do quality marketing. I took a lot of time to create free marketing buzz, but in order to get the customers that I needed to succeed, I needed to spend money on marketing. Since I didn’t have any money, my credit card became my business loan. Soon, I found out that I would need another credit card to continue with my marketing plan. Another credit card added to the bunch put my total to three; two of which were close to being maxed out.”
Four years into his business, Grayson decided to close it. At that point he had nearly $50,000 in credit card debt. Eventually, he was able to pay that all back without filing for bankruptcy or ruining his credit rating, and he shares how he did that on his blog. But he warns others about going down the road he went down. “The main thing I learned was to never, ever use a credit card to start and run a business,” he says.
Not all stories end like Grayson’s. Some businesses funded with plastic succeed. Others fail, and their owners wind up in bankruptcy. His is a cautionary tale, though, for those who might be tempted to just charge their start-up expenses and worry about how to pay them later.
When the US General Accounting Office submitted a report to Congress on the use of small business credit cards, it said that “the vast majority of small businesses use personal or small business credit cards.” At the time the GAO conducted its research (the end of 2009), it found that 83 percent of small businesses used credit cards. Of that number 64 percent used small business cards, and 41 percent used personal cards.
Starting out, entrepreneurs usually have two choices: to use personal credit cards for business purposes, or to get a small business credit card. Whichever route you decide to go, one of the most important things you can do is to make sure you have a credit card that you use strictly for business purposes. That means you should not put any personal purchases on this card.
There are three good reasons for this:
• It can make your life much simpler come tax time. Your accountant will be able to easily identify your business purchases, and be able to make sure that you get the appropriate deductions.
• It may save you money at tax time. If you use your card strictly for business purposes, you may be able to deduct the interest, annual fee, and other fees. This is much harder to do if you mix business and personal purchases on the same card.
• It can make it easier if you need to shut down. If you must unwind your business, and heaven forbid consider bankruptcy, then having separated your purchases onto separate cards will make it easier to identify which ones were for business purposes and which ones weren’t.
Of course, you have a choice of whether to use a business or a personal credit card for the purchases you make for your business. While, technically, you aren’t supposed to use a personal credit card for your business, it’s not that hard to do. It’s not like your card issuer is looking over your shoulder and questioning whether that paper you purchased is really for your kid’s school supplies instead of for your business. (They earn their percentage in either case.)
In the past, the decision between using a small business card and a personal one was pretty easy. But it’s become more complicated thanks to the Credit CARD Act. That legislation, which was passed in 2009, gave consumers significant protections when it comes to their credit cards. It stopped the practices for example of raising interest rates on outstanding credit card balances at any time for any reason, and restricted penalty fees, among other things.
This law, however, specifically excludes business credit cards. So that means that a card issuer can still raise interest rates on business or corporate credit cards at any time, or set cutoff times for a payment to be received in the middle of the day, instead of by 5 PM as required by the CARD Act, for example. And those are just a couple of examples of the protections that don’t automatically come with business credit cards.
Fortunately, some card issuers have extended some of the protections the CARD Act offers to their small business cards. If this is important to you, then look for a card that offers these protections.
Summary of Protections Under the Credit CARD Act
Here are some of the consumer protections offered under the federal CARD Act. Again, these apply to personal—not small business—credit cards, though, as mentioned, some issuers include these on their business cards.
Before changing your interest rate, increasing fees, or making other significant changes to the terms of your credit card, your card issuer must send you 45 days advance written notice. You then have the option to “opt out” of the change in terms and pay back the balance at the previous terms. (You may have to close your account.)
Your issuer can’t raise your rate the first year unless you are 60 days late with a payment, your card has a variable rate tied to an index that changes, or an introductory rate expires.
No “floating” due dates are allowed. Your due date must be the same date each month and the cut-off time for receiving payments can’t be earlier than 5 pm. If your due date falls on a weekend or holiday when your issuer doesn’t accept payments, you can make your payment the following business day without penalty.
If you pay more than the minimum payment due, your card issuer must apply the amount over the minimum toward the portion of the balance with the highest interest rate, not the lowest rate as they did before this law went into place.
Late fees are capped at a “reasonable amount” (generally $25) and card issuers can’t charge an over-limit fee unless the consumer has “opted in” to allow their card to go over the limit.
If small business or corporate cards don’t offer those protections, then why would you, as a business owner, even consider one? One good reason is to help protect your personal credit. Balances on your personal cards almost always show up on your credit reports, but balances on business cards aren’t typically reported to the personal credit reporting agencies. If your business relies heavily on credit cards for financing, it’s helpful to keep that information off your personal credit reports so that your credit scores don’t drop due to the maxxed out credit card. A warning: Do not assume that if one of these accounts does not currently appear on your credit reports that it will never show up there. Almost all small business cards will require a personal guarantee and will report payment history to the guarantor’s personal credit if the account goes into default. Out of the top ten issuers of these cards, only one does not report any payment information to the owner’s personal credit reports.
In addition, around the time the Credit CARD Act became law, one of the major issuers of small business cards decided to start reporting all of the activity of their small business cards on the owners’ personal credit reports. Some business owners saw their credit scores plummet due to the debt they were carrying on one of these cards. Because their credit scores dropped, they were having a hard time getting a different card to use to transfer the balance. It was truly a Catch-22.
Can one of these cards help you build business credit? It depends. Most of them do report payment history to at least one of the major corporate credit reporting agencies.