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Signing up and using a small business credit card can either be a fantastic deal or a horrible investment for most startups. It will heavily depend on the company’s level of preparedness when choosing their piece of plastic. This article will outline for small businesses why getting a credit card for their company may and may not make sense.
Reasons to apply for a small business credit card
- Using the right rewards credit card can turn into substantial savings. Whether your small business credit card earns miles, points, or cash back, every purchase you charge to it will give you returns on your transaction. At the very least, business credit cards can provide users with a 1% rewards rate – though some go as high as 5%. Over time, this kind of savings can help free up cash flow for your business, and help the company to afford other purchases at a faster rate.
- Credit card rewards are not taxable income (for the most part). The IRS classifies cash back rewards as a “price reduction”, and therefore it does not need to be reported as income. Airline miles and points are a little trickier. The miles you earn from spending money are for the most part tax-free. In 2002, the IRS announced that — due to administrative and technical issues — it would not pursue a “tax enforcement program with respect to promotional benefits such as frequent flyer miles”. However, enforcement of this policy has been inconsistent. For example, in 2014 the Tax Court ruled that ThankYou points issued by Citibank to customers who received them as part of a promotional offer for opening an account, were subject to income tax (2.5 cents per mile).
- Building credit history. Just like consumers, businesses can be issued a credit score that lenders use to determine credit worthiness and financial stability — more precisely, the confidence in a company’s ability to pay back a loan. Using small business credit cards can be an effective way for a startup to establish credit history, and begin building up their score. Keep in mind that if you hope to improve your business credit score, you have to pay your bills card bills on time, every time. Even one missed payment can be devastating to your score.
Reasons to NOT apply for a small business credit card
- Interest, interest, interest. Business credit cards tend to have pretty high interest rates, and if you’re using them to finance certain purchases, you can expect to pay a ton of money in interest. Our research indicates that the average APR of a business credit card is around 16%. If you were to have $5,000 in outstanding debt on such a card, making monthly installments of $500, you would pay $326 in interest over a period of 11 months — a 6.5% premium over your original loan amount.
- Limited legal protections. In years past, credit card agreements were filled with underhanded offers, which would take advantage of consumers who did not read the fine print. Fortunately, the CARD Act of 2009 was passed into law, and the Consumer Financial Protection Bureau was formed to protect consumers from these credit card practices — emphasis on “consumers”. Credit issued for business purposes is specifically omitted in much of the protections outlined in the CARD Act of 2009. That means businesses applying for credit need to be especially careful and make sure they go over the entire terms of their loan carefully. Missing anything can have costly consequences.
- Increased liability through employee cards. Companies that add employees as authorized users onto their credit card account will be held liable for any purchases charges made to it — even if they were made for non-business purposes. Fortunately, many of the best business credit cards come with account control features that allow business owners to set individual card limits, and track spending. Even still, this opens up a potential liability for your business — and tales away a certain level of control away from your finances.
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