At Punch Associates, a firm that specializes in helping small business owners and consumers get out of debt, we are often asked if it is a good or bad idea to have business credit card debt. The answer is that it depends on a few factors whether the debt is helpful or harmful to your business.
According to Nolo Press, most business credit cards are issued when business owners sign a clause that makes them personally responsible for the debt. This means, even if you have a corporate identity, you will be personally responsible and your credit score may suffer if you fail to pay the debt.
On the other hand, not every credit card issuer is quick to ding your personal credit score if you miss a timely payment. Nerdwallet compiled a great list of which major issuers of business credit cards report payment history on the business card to your personal credit score or not. Some of the major players do not report your business card payment history on your personal credit score, including Bank of America, BBVA, Citi and Wells Fargo(!).
All of the major card issuers do report your payment history on your business credit card to commercial credit bureaus, except BBVA. Thus, the bad news is that you are usually personally liable for business credit card debt. The good news is that you can choose a card issuer that will not ding your personal credit score for your payment history on your business credit card, and you can use a good payment history on your business credit cards to improve your enterprise’s creditworthiness.
The Interest Rates
The really bad news is that the interest rates on business credit cards are ridiculously high. The average rate is around 14 percent. Obviously, at rates this high, you end up servicing a lot of interest fees, if you carry debt on the card. Also, it can be really hard to pay off the debt at interest rates this high.
Who Gets the Card
We suggest that businesses limit who gets to use business credit cards. Otherwise, you can end up with a nightmare of unexpected expenses. Some companies simply have employees front the expense with their personal credit card, keep a receipt and count upon being reimbursed.
Other Benefits of Business Credit Cards
According to Investopedia, other than helping build business credit, business credit cards have a few more benefits:
- They are easier to qualify for than a bank loan.
- They are convenient because they allow one to make online transactions.
- They help weather the waiting time on accounts receivable.
- They often provide a rewards program.
The Other Drawback of Business Credit Cards
Other than high-interest rates, the dangers of misuse by employees and the risks to your personal credit by the personal liability clause required by almost all business credit card issuers, Investopedia found that there is one more risk of business credit cards that all business owners need to be aware of. These cards do not have the same legal protections that come with consumer credit cards. Thus, your interest rate can fluctuate without notice, based upon your usage of the card. Also, you may not have much protection when you have a billing dispute or when you need to return an item purchased.
Here at Punch Associates, we suggest that business owners use a business credit card to build the creditworthiness of your business and pay the balance every month or very soon. The danger at the interest rates charged on credit cards today is that one will have tremendous difficulty paying down the balance, which may harm your company’s cash flow.
If you are aware of their dangers and use them responsibly, business credit cards can help shore up cash flow issues for a few weeks at a time and improve the credit score of your business. If you have any questions on business credit card debt, contact us at Punch Associates. We are here to help