Guest columnist Odysseas Papadimitriou explains the do's and dont's of small business borrowing.
The times certainly are a-changin’ when it comes to small business credit cards.
Since the CARD Act—the personal finance reform legislation that outlawed shady credit card company practices and boosted consumer protections—took effect in February 2010, the 82 percent of small business owners who use credit cards for business funding purposes have had increased opportunities to garner debt stability never before possible. While this potential has unfortunately been under-realized to date, the most strategic small business owners can indeed put their companies at an advantage.
All you need to do is have an open mind and understand a few things about the current business credit card landscape.
The first thing you need to know is that so-called small business credit cardsare more closely tied to their individual cardholders than the companies or business ventures they are supposed to complement. More specifically, you will be held personally liable for spending and usage information will be relayed to your personal credit reports whether you’re using a business-branded credit card or a personal credit card.
This is important not only because considering both business and personal credit cards will broaden your overall options, but also because it will ensure that you are not dealt any cost-of-debt surprises down the road. You see, business credit cards do not fall under the scope of the CARD Act, which means if you use one to revolve a monthly balance, your interest rate could change unexpectedly and for whatever reason.
In contrast, when using a personal credit card, the interest rate applied to an existing balance can only be increased if a cardholder becomes at least 60 days delinquent.
Surprisingly, garnering this CARD Act protection does not come at the price of worse interest rate terms, as Card Hub data indicates that a zero percent introductory purchase APR is available for as long as 21 months with a personal credit card, as opposed to just 12 months with a business credit card.
While personal credit cards are undoubtedly the way to go in terms of financing your business ventures, business credit cards remain integral as well. The main thing that differentiates them from personal credit cards is the host of unique business services they offer, which includes enhanced business expense tracking capabilities, the ability to set custom limits on employees’ cards, and centralized company rewards. For this reason, rewards business credit cards are an ideal choice for any purchases that the company will be able to pay for in full before the end of each billing period.
In addition, using a two-card strategy will also allow you to get the absolute best terms for each of your primary business credit card needs. Instead of finding one card with a pretty low interest rate and decent rewards, you can get the absolute best zero percent credit card for upcoming purchases that you cannot immediately pay off and the best business rewards card for those that you can. Therefore, in this post-CARD Act environment, being able to ignore credit card branding can help you lower costs and gain some much needed peace of mind.
Ultimately, we can expect major credit card companies to take notice of this type of strategy and begin proactively applying all CARD Act protections to their business credit cards in order to wrap convenience and debt stability in a neat one-card package. As of yet, only Bank of America has done so, though Capital One, JPMorgan Chase, Citi, Discover and American Express have also applied select aspects of the law to their business-branded offerings.
Odysseas Papadimitriou is the founder of Card Hub, a credit card marketplace where small business owners can compare zero percent credit card offers as well as rewards business credit cards.