Business credit cards are a common choice for B2B companies to increase cash flow, build credit score, purchase new equipment, and cash in on other benefits. In fact, 67% of small businesses already use a credit card.
However, you need to be knowledgeable about how business credit cards work if you want to get the most out of them, while reducing the downside. There are many small details that are often overlooked, and merchants need a plan to use business credit cards responsibly.
That’s why we put together this guide to help B2B entrepreneurs like yourself learn about the pros, cons, and how it compares to what we offer at Resolve.
What are business credit cards?
Business credit cards are identical to personal credit cards in that they extend a line of credit to the individual, or business in this case, to use.
Unlike a personal credit card you might use for groceries or a phone bill, business credit cards are used for expenses, having access to quick cash flow, and similar situations.
They have identical interest rates, fees, and other aspects that you experience with a standard credit card, as well. If you’ve ever had a personal credit card, you won’t find that a business card credit is any different in the sense of using it, but rather changes for what you use it.
These cards are also used to build a business credit score and for incentives like travel points. You will be learning more about the pros and cons of business credit cards, in depth, later in this article.
How do you qualify for a business credit card?
Obtaining a standard credit card is usually as simple as requesting one from a bank and providing basic financial information. It’s sent in the mail, and you’re good to use it after it’s activated.
However, business credit cards work a little differently. You will be required to show proof that your business exists, such as a statement of incorporation, business license, tax returns, financial statements, or similar documents.
Sole proprietors can apply for a business credit card under their own name, since they operate under it. Application typically mandates an in-person meeting at a local bank branch to receive the card.
Business credit card advantages
Now that you understand how business credit cards and their qualification process works, let’s touch on the advantages to using them.
Access to easy cash flow
Have you ever been in a position where you wanted to purchase new inventory, onboard new clients, or increase advertising expenditure, but didn’t have the budget?
With a business credit card, merchants like yourself can enjoy access to immediate cash flow that can be used to cover expenses and invest in marketing or other activities.
Rewards and incentives
Using a business credit card nets merchants various rewards and incentives, such as cash back, travel points, or discounts at certain stores.
Look at these business credit cards from Chase, for example.
Some of their rewards include discounts on office supplies, restaurants, and stores, which are also common tax write-offs.
These incentives are good for business owners because not only do they benefit you in various ways, but align with business activities like travelling to meet manufacturers, clients, etc.
Builds credit score
Credit score is the lifeline for many B2B businesses. It will determine how quickly and easily you are accepted for loans and other forms of financing in the future.
Using a business credit card will gradually build up your credit score, also allowing merchants to reap lower interest rates. Smaller charges like these means that you get to enjoy the benefits of a credit card with less of a financial impact over time.
No collateral is required
Collateral is required upfront for certain loans to protect lenders from not being paid back. You don’t have to worry about this with a credit card, as there is no collateral that needs to be given to banks or other institutions when applying.
Business credit card disadvantages
While credit cards for businesses have their advantages, there are some drawbacks you need to be aware of before using them, such as the following.
High interest rates and other fees
Credit cards can often include hidden fees, high interest rates, or other charges that make them very expensive in the long term.
Depending on the financial institution that issues the credit card, there may be fees for balance transfers, cash advances, replacing a card, or expedited payments.
Merchants need to do thorough research into the business credit card in which they are interested to avoid these.
Less protection than other forms of financing
There was over $6.4 billion worth of credit card fraud committed in 2018. This is more than a 100% increase from the $3.1 billion in 2015.
While the form of fraud in which a card is present at the time of purchase has decreased dramatically, the amount of card-not-present fraud, or CNP for short, is rising rapidly.
This means that merchants need to be cautious when and where they use a business credit card to avoid it being stolen. If it is used against your will, it can negatively affect credit score, business operations, and may cause serious damage.
They can be used irresponsibly
Credit cards are tools, which means they will only benefit a business as well as they are used. There is a risk that business credit cards can be used irresponsibly by merchants or employees because of this.
For example, a business may use a credit card, but not plan well enough in advance to be able to make payments on it. Similarly, poor management of business credit cards could result in excess spending on advertising or other areas of a company.
Business credit cards help merchants gain access to instant cash flow, rewards, and a higher credit score, all without the need for any collateral. It seems like a dream come true, right?
As good as it seems, there are some negatives to business credit cards to keep in mind. First, compared to a service like we offer at Resolve, you will be exposed to higher interest rates, extra charges, and hidden fees. These can add up over time.
Second, a business credit card isn’t guaranteed to be secure. Credit card and identity theft is still a large issue in America, and growing in many ways. Merchants need to be aware of the risk they are carrying when using a credit card for business expenditures.
Responsibility is another issue with credit cards, as the rush of having new cash flow can result in it being overused.
This is why merchants should contact us at Resolve to learn more about how we can help you convert new leads, increase repeat purchases, and more through our payment solutions.