About Small Business Credit Cards

More than ever, today's business owners need alternative forms of lending to compensate for the tight money supply currently available from banks. Especially with the continued economic weakness that's causing banks to be more strict about making loans. One of the choices available to small business owners is the small business credit card. This is a great way to fund the capital needs of your business without having to jump through the hoops required for bank financing. However, there are some dangers in using small business credit cards as well.

Before we get into discussing the various types of small business credit cards you should consider the fact that credit cards can be both a useful financing tool and a financial trap at the same time. The nature of credit cards demands that they be used responsibly in order to protect yourself from getting into trouble you can't get out of. Credit cards are not free money to be used without restraint. They need to be managed wisely in order to protect your business and your personal finances. With that said, the most common types of business credit cards are:

• standard rewards cards
• cash back cards
• charge cards
• open the terms cards

Standard Rewards Credit Cards

The standard rewards card for business works nearly the same way it does in the consumer credit card market. A rewards card presents the small business owner with a certain limit based on several factors including credit history and credit score. For every dollar in purchases applied to the card the business owner receives reward points which can be redeemed for a number of things. Points might be redeemed for airline tickets, business services, gift cards, entertainment options, office supplies, or even cash.

Along the same lines are cash back cards which substitute reward points for cash rewards. These types of cards reward card holders by allowing them a certain percentage of cash back for every dollar in purchases. Most cash back small business cards offer 1% to 2%. There are a few higher-quality cards that offer 5% or better. These cards are an extremely good idea if the card holder can pay his balance off in full every month. In doing so, he is paying no interest while also earning the cash back rewards at the same time. Essentially, the credit card issuer is then paying the business owner to use the card.

Charge Cards

Despite what you may think, a charge card and a credit card are not the same thing. A credit card is essentially a revolving line of unsecured credit which can be consistently increased up to your limit. If you cannot pay off your entire balance at the end of the month, the remainder is carried into the next month and interest charges applied accordingly. By contrast, the charge card must be fully paid off by the due date every month. Typically card holders will have a 3 to 5 day grace period, but nothing more after that. As long as the balance is paid in full a very low interest rate is applied. If a payment is late or missed entirely, punitive interest rates will be assessed. Many of the most popular small business credit cards at American Express and other credit card companies are actually charge cards. If you think there will be times when you'll need to carry a balance forward, a charge card is probably not the right fit for your small business.

Open Terms Cards

The open terms cards is more or less a hybrid product combining the best of the credit card with that of the charge card. With one of these cards the small business owner can choose whether to pay his bill in full every month or carry a balance from one month to the next. Both options have their pros and cons and need to be examined closely by the card holder. It's also a smart idea to determine how often you can change your terms with such a card. The choices you make regarding your terms will affect your monthly payments, due dates, and finance charges.

Choosing a Card That's Right for You

Every small business has its own specific financial needs. Therefore, it's impossible for us to recommend one particular type of card as being the best. If you have already hired an accountant or financial manager, this is something you should sit down and talk to him about. He has the experience necessary to advise you what the best type of card for your circumstances is.

If you don't yet have an accountant or financial manager, speak to other small-business owners through a trade organization in your area. You can also contact your local chamber of commerce and the federal small business administration for informational materials regarding financing.

If it turns out your choice of credit cards was probably the wrong one for your business, stop using the card, pay off the balance, and then apply for one that's more appropriate to your needs. Don't continue to use a small business credit card that is detrimental to your business or your cash flow. Doing so could cause you more harm than good.

Controlling Credit Card Use

Just like consumer credit cards, small business credit cards often come with the option of having additional cards issued to employees you authorize. If you should decide to do this you need to set very specific parameters regarding what the cards can and cannot be used for. In addition, you must scrutinize statements every month to make sure your employees are not abusing company credit cards. This is one of the most common ways small businesses get themselves into financial trouble.

The other important factor in controlling credit card use is to keep your limits as low as is reasonably possible. If you are a responsible card holder, it is quite likely your credit card company will automatically raise your limits as time goes by. Yet this is a temptation to spend more money than you really should. If you don't need as high a limit as your credit card company is offering, don't be afraid to contact them and request they not increase your limit. There's no point in opening the door to overspending if you don't need the higher limit.

Know Your Terms and Conditions

It would be unwise to discuss small business credit cards without bringing up the topic of terms and conditions. It is important that business owners fully understand the terms of their credit cards before accepting them. For example, what is your interest rate for standard purchases and balance transfers? What is the penalty APR, if there is one? Are there any annual membership fees or monthly maintenance fees? All of these things are important because they all have a direct effect on your credit. Make sure you know the details for your own protection.