How Do Business Credit Cards Work? 10 Important Insights

Updated on August 10, 2020
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Regardless of your business’s age, size, or industry, one of the simplest and most attainable methods of financially supporting your company is signing up for a business credit card. But how do business credit cards work, exactly?

Truthfully, business credit cards work much in the same way that personal credit cards do: This little piece of plastic gives you access to a line of credit directly at the point of sale, as well as perks, rewards, and benefits. Unlike a personal card, though, your business credit card is intended to finance your business’s expenses, not your own.

But those are just a few defining characteristics of business credit cards, all of which we’ll explain in more detail. Once you know exactly how business credit cards work, you’ll be able to make an informed choice about which cards to apply for, and use appropriately.

Here are a few more insights to consider about how business credit cards work. Mull them over before opening one (or two) of your own.

10 Important Facts About How Business Credit Cards Work

There’s a lot to learn about business credit cards, but start by nailing down the following 10 essential facts about these important financing tools.  

1. They’re easier to qualify for—and use—than other types of loans.

While you’ll need to provide a slew of credentials to qualify for a small business loan—like strong revenue, time in business, credit score, industry risk, and more—credit card companies won’t ask for nearly as many qualifications on their applications. All told, the application and underwriting process takes a matter of minutes (unlike a small business loan application, which can take days or weeks).

Credit cards also allow you instantaneous access to financing, so they’re especially useful for meeting your business’s short-term needs—think material purchases, client dinners, internet services, and filling up your tank between meetings. And as more and more businesses no longer accept cash, or are online-only, having a business credit card in addition to cash will become essential. Not to mention the fact that they’ll help you look more professional, which will increase your business’s credibility.

2. Business credit card issuers consider both your business and your personal financials…

On your business credit card application, your card issuer will request some information about your business financials, including your income and estimated monthly spend. (That’s partly how they’ll determine your eligibility for the card and, if so, the size of your credit line.)

If you’re a startup and don’t have much of a business income, don’t worry too much—as the primary cardholder, you’ll also provide your personal income and personal outstanding debt on your application. That’s how they’ll calculate your debt-to-income ratio, which shows the card issuer whether you have the financial bandwidth to take on more debt. And as long as you can prove that you can repay what you owe, whether that’s using funds accrued from your business or not, your card issuer might still approve you for a business credit card.

3. …and your personal credit score.

Along those lines, the card issuer will look at your personal credit score during the application process. It may seem intrusive (or at least irrelevant) for the card issuer to look at your personal credit score for a business credit card. But your credit score is a numerical indication of how well, or poorly, you’ve honored your debt agreements in the past. You can imagine why the card issuer—or any other small business lender—would consider the primary cardholder’s personal credit score a good indication of how well they’ll handle their business’s debts, too.       

So, it would be wise to monitor your credit score beforehand to see where your score stands. That’ll give you a sense of which cards you’re eligible for—most cards publish a minimum credit score you need to apply.

Also bear in mind that the more credit cards applications you submit, the more likely that your credit score will suffer, since card issuers make a hard credit inquiry with each application.[1] To reduce the chances of this happening, thoroughly research which credit cards are best for you, and apply to no more than a few at a time.

4. They might or might not affect your personal credit score.

Although credit card issuers will check your personal credit score during the underwriting process, using your business credit card might not actually impact your personal credit score. That all depends on whether the issuer reports credit activity—either positive, negative, or both—to the consumer credit bureaus (the three biggest are Equifax, Experian, and TransUnion). Check with the card issuer directly to see how and where they report card activity.   

That said, most business credit card issuers do report credit activity to the commercial credit bureaus (Dun & Bradstreet, Equifax, and Experian), which is a good thing—a strong business credit score can increase your purchasing power over time. Although credit card companies don’t typically consider your business credit score in your application, certain small business lenders might. So, as you build up your business credit history through responsible card usage, you’ll position yourself to qualify for a traditional business loan down the line.  


5. They provide perks and rewards that help you run your business.

Just like your personal credit card, your business credit card can offer a wide variety of rewards programs, including cash back incentives, redeemable points, and travel insurance.

Unlike your personal card, though, these rewards programs are geared specifically toward businesses. For instance, the Chase Ink Business Cash Credit Card offers 5%, 2%, or 1% cash back, depending on where you make your purchases. But all of those purchasing categories encompass typical business expenses, like office supplies, cell/internet/cable services, gas, and dining out. Credit lines are also often higher on business credit cards than on personal cards, so you have more room to pay for the tools and materials your business needs to function.

6. They don’t offer the same protections as personal credit cards.

There are so many reasons to use a business credit card—but nothing in life (or in small business finance) is perfect! On the downside, most business credit card holders don’t have the same protections as consumer credit cardholders.

More specifically, the Credit CARD Act of 2009 doesn’t apply to business cards. This act limits interest-rate hikes and offers card holders the right to opt out of significant changes to the terms on their accounts, to name a few. So, it’s important to thoroughly research the breadth of protection that a card offers before submitting your business credit card application.

7. They might actually be charge cards.

Before you apply for a business credit card, you’ll of course need to determine which type of credit card is right for you—and whether that’s a credit card at all. Instead of a typical credit card, you might want to consider a charge card. (Fun fact: Most American Express cards are actually charge cards.)

Charge cards technically work like business credit cards do: Your card issuer extends you a line of credit from which you can borrow. But the major difference is that, with a charge card, your card issuer doesn’t cap your credit at a predetermined limit. That’ll give you more wiggle room to pay for bigger purchases without worrying about harming your credit utilization ratio (and your credit score). However, you must pay your charge card bill in full every month. If you carry a balance, you’ll need to pay a hefty late fee.

So, a charge card might be a good option if you need the high credit limit to pay for expensive purchases, but it’s not a good idea if you can’t pay down those purchases month to month. Also keep in mind that charge cards are generally only viable options for business owners with very good credit scores—think in the high-600 range.

On the other hand, credit cards have a minimum payment due each month. If you carry a balance, then your interest rate kicks in.

Whether you opt for a credit card or a charge card, take care to spend smartly—don’t use credit cards for extra-large purchases if there’s a chance you can’t pay it off in full before either your interest rate or your late fee applies. The purchase will end up costing you substantially more in the end. And if you max out your card’s credit line, then you may not have access to credit when you need it the most.

8. Your employees can use them.

One of the great advantages of business credit cards is the opportunity to include employee cards. But this is another area where you can get into financial trouble, so tread carefully.

Before offering employee cards, think about who really needs one, and limit who has access to company cards to only the most necessary staff members. Then, set up activity alerts to catch overspending or fraud, track purchases, and set limits (which can often be customized for each card). This will allow you to protect your business from employee mismanagement.

9. They should only be used for business expenses.

It’s extremely important that you use your business credit card for business purposes only. Separating your personal and business finances leaves less room for clerical error (Did I buy those office supplies for the company or for my child’s school project?). That clarity is especially important come tax season.

Being disciplined in where you use your card also helps you analyze where you’re spending money as a business, without having to weed out personal charges (Was that gas purchase for meetings or my family vacation?). That way, you can easily analyze your spending habits and make decisions about where you can save, or where you have some room to spend.

10. They might require a personal guarantee to secure.

Business credit cards almost always require the cardholder to sign a personal guarantee, which means that you’re personally, legally liable for repayment if the primary payer (aka your business) can’t meet their debt obligations. So, if your business starts to struggle financially, and you fall behind on your payments, the card issuer has the right to go after your personal assets to recoup the debt.

The key words to look for in the fine print are “commercial liability” and “joint and several liability.” Commercial liability means that the business is responsible for paying all debts. Joint and several liability means that both the business and the individual who opened the card are liable. So, even though you’re only using your business credit card for business expenses (right?), just be aware that your own coin purse is on the line if your business can’t pay.


How to Find a Business Credit Card that Works for You

Every small business owner needs a business credit card.

Yes, that’s a blanket statement. But business credit cards truly can be one of the most useful tools in your business’s financial arsenal—and that has a lot to do with how they work. Whether you’re still breaking ground on your new business, or if you’re just looking for a convenient financing tool to help you grow, a business card is absolutely worth the consideration.

But when you search for your perfect business credit card, you might feel like you’re drowning in the fine print. Here are some of the most crucial terms to look out for. They’re all definitive of how any particular business credit card works, and whether it’ll work for you.

  • Rates and fees: What are the card’s interest rates for purchases? For cash withdrawals? For balance transfers? Is it a fixed rate or a variable rate? What can cause an interest rate hike?
  • Annual fee: Is there an annual fee? Is it worth it for the card’s rewards program?
  • Foreign transaction fee: If you travel abroad often for business, avoid cards that charge for overseas spending.
  • Penalties: What actions (or inactions) will result in a penalty fee?
  • Payment window: How long is a standard billing cycle? (This can sometimes be shorter on business cards than it is on personal cards.)
  • Signup bonus: Are there are any that are especially attractive for your business? Cash back? Airline miles? Points?
  • Employee cards: Does this card offer employee cards? This may be something you’ll need, if not now, then in the future.

Although there’s a lot to think about, you didn’t get this far by taking the easy way out. An investment of time and careful consideration now may mean setting your business up for a smoother road ahead, and that’s priceless.

Article Sources:

  1. “Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO Score?
Brayden McCarthy
Contributing Writer at Fundera

Brayden McCarthy

Brayden is a credit card expert and the former vice president, new markets at Fundera. He’s passionate about helping businesses take advantage of the best credit card offers on the market, from the longest 0% intro APR periods to the richest cash back and travel rewards bonuses.

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