Business Credit Cards
Most of the credit cards you see advertised were created for individual cardholders; people who want to put their everyday purchases on a credit card, rather than use debit or cash. If you’re a business owner, however, you may want to consider getting a credit card specific to the needs of your business. Here’s some information on how business credit cards work in Canada.
What are business credit cards?
Business credit cards generally operate just like personal credit cards. There is an application process, followed by either an approval or a denial. If approved, a credit card issuer will grant a certain credit limit, and the annual interest rate and other charges are usually comparable to that of personal cards. Almost all of the terms and conditions that apply to a personal credit card also apply to a business credit card.
Personal liability for a business credit card
There is usually a legal separation between the debts of an individual and the debts of a company they own; this is why corporations have what is called “limited liability”. The debts of the corporation are literally “limited” to the company itself, not the owners.
Unfortunately, many business credit cards do not operate in this way. In fact, for many cards, the liability is shared between the company AND the individual who applies for the card. A phrase you will see in business credit card agreements is “joint and several liability”. What this means is that the charges on a business credit card are the responsibility not just of the company that uses it, but also the owner of the business. (This applies more to small businesses. Larger corporations have special arrangements with credit card companies). This is also referred to as providing a “personal guarantee”, meaning you personally assume liability for any debts incurred if the business is unable to meet its obligations.
Example: Robert needs new computers for his business
Robert is an entrepreneur and wants to expand his business. To do so, he needs to invest in some new computers. Lacking the funds, he gets a business credit card from a bank and proceeds to accumulate a $30,000 balance. He gives the bank a personal guarantee for the card. Unfortunately, the economy then falls into recession and he has to close down the business. He’s able to sell the computers for $20,000, which he uses towards the $30,000 balance. But what happens to the remaining $10,000 balance? (For the sake of simplicity, let’s ignore all the interest charges he will continue to incur.)
In this situation, the bank will not just forgive the remaining balance. Because Robert agreed to be personally liable for the business credit card, he is on the hook for the $10,000 still owed. He may even have to sell assets, such as his house or car, just to pay off the balance. If the card did not come with “joint and several liability”, the bank would only be allowed to pursue the assets of Robert’s company – not his personal assets.
What are the advantages of using a business credit card?
Despite their similarities, there are some key differences between personal and business credit cards. First, business credit cards tend to be given higher credit limits. This is advantageous if you’re a business owner and need to make large purchases from time-to-time. In addition, a business credit card can help tide a company over when it expects to be paid by customers in the future but has expenses now. This ability to smooth cash flow is a major benefit of having a credit card for your business. Of course, this should always be weighed against the option of a line of credit at a potentially lower interest rate.
Second, some credit cards have rewards that are specifically tailored to businesses. For example, say your company buys a lot of materials at an office supply company. A business credit card might offer significant rewards every time you shop at a particular store. Alternatively, if you’re an entrepreneur who travels a lot, a business credit card might give you enhanced points every time you stay at a particular hotel chain.
Another advantage to having a business credit card is that it helps you track your expenses. While it is possible to use a personal credit card for business expenses, it means that every month you have to figure out which charges were for personal needs and which were for your business. Having all the expenses on one card linked to business will save you time and hassle when it comes to bookkeeping and preparing your taxes. (And accountants love this, so you may even get a discount on their services.)
We often talk about how using a personal credit card helps to establish good credit and the same is true with a business credit card. Using a business credit card is a way for your company to build its own credit history; this will help convince future lenders that you are a reliable borrower.
What are the disadvantages of using a business credit card?
One downside to having a business credit card is that it could affect your personal credit score. If you are constantly late paying your bill, or end up not paying at all, it is not just the business’ credit rating that will take a hit.
Another potential drawback is the flip-side of having a bigger credit limit. You may be tempted to take on more debt for your business than you would if you only had your personal credit card. The lesson here is just because you can have a bigger credit limit, that doesn’t mean you should use it.
Finally, keep in mind that the interest rate for a business credit card will exceed that of a business line of credit (e.g. a bank loan), as mentioned above. This isn’t an issue if you always pay off the balance in full, but if you constantly maintain a balance the business will incur significant interest charges.
Who can qualify for a business credit card?
For some business credit cards, you will have to show proof of your business’ existence to a bank before they will issue a card. This may include documents like articles of incorporation, a business licence, partnership agreement, tax assessments or financial statements. However, sole proprietors who do business under their own name (without being incorporated) can also qualify for some business credit cards. In other words, you don’t have to be a registered business to obtain one of these cards.
Should you apply for a business credit card?
If you have a business for which the use of a credit card is a weekly necessity, a business credit card is something to consider. The card allows you to keep your personal and business expenses separate, and potentially earn meaningful rewards in the process. Just keep in mind that a higher credit limit can tempt you to over-borrow and you may be liable for your business’ debts.