What is a business credit card and how do I get one?

Do you want a simple and flexible business loan to help spread your costs and manage cash flow? If so then a business credit card might be a great solution. It could help your business to build a good credit rating to improve future borrowing terms.

In this guide we explain how business credit cards work and the pros and cons of using one. We also answer common questions like “can I deduct credit card interest as a business expense?” and “are business credit cards personally guaranteed?”

Table of Contents

What is a business credit card?

Business credit cards are a form of short term business loan. You can make purchases using the business credit card and you will get a monthly statement setting out what you owe. Purchases are interest free until the statement payment date. Any credit card balance that is not paid off on the payment date will be charged interest until it is paid off.

How does a business credit card work?

Business credit cards work just like a personal credit card. Your business uses the credit card to pay for purchases or expenses. You then repay the credit card every month. You can choose whether to repay the minimum balance or the full balance. If you only repay the minimum balance then the remaining debt will attract interest at the agreed APR.

You can borrow using your business credit card up to your agreed credit card limit. Once you have reached this limit then any new payment will be declined until you pay off some of your balance.

How is interest calculated on a business credit card?

Most lenders calculate interest on business credit cards every day. That means you could end up paying more than the headline APR if you don’t pay off your balance in full each month. That’s because of the way interest compounding works. If the lender adds interest to your balance each day, you’ll end up gradually paying interest on a higher figure.

What are the fees on a business credit card?

Some lenders charge annual fees on their business credit cards, typically around £50-200 per year. You might not have to pay the annual fee if you spend over a certain amount each year. Some lenders also charge extra fees if a card is inactive.

What can I use a business credit card for?

Your business can use a business credit card to help with the following:

  • Managing expenses - many business owners use a business credit card to manage their expenses. Most lenders offer more than one credit card so your employees can use the cards to pay for expenses. This reduces admin costs as you won’t have to process expenses claims and reimburse employees for hotel or business vehicle costs.
  • Short term funding - you can use a business credit card to pay for unexpected expenses. It may be possible to apply for another type of finance before the credit card is due for repayment.
  • Spreading the cost of large expenses - your business can spread the cost of paying for expensive equipment like office furniture. Because credit cards sometimes aren’t due for payment for over 90 days it can give you an extra 3 months to save up to pay off the card.

Business credit cards aren’t usually suitable for larger-scale or long term borrowing. This is because you will be charged high interest rates unless you pay off the card in full.

What are the pros & cons of using a business credit card?

Here are the main pros and cons of using a business credit card.

Pros

  • Interest free period on borrowing - this is usually around 45 days but can be up to 90 days depending on when your payment date falls due.
  • Separation of finances - small business owners often use business credit cards to keep personal and business finances separate. This makes it easier to prepare year-end accounts as business expenses aren’t mixed in with personal spending.
  • Introductory interest free period - some lenders offer a 0% interest period for new cards.
  • Cash back - some business credit cards offer 1% cash back on all purchases.
  • Discounts - lenders often give discounts to business credit card users. For example, some offer a 10% discount on car servicing and replacement tyres.
  • Travel perks - some lenders provide travel perks to business credit card customers, for example British Airways currently offer business credit card users free business miles for using their card.
  • Reduced foreign exchange charges - lenders sometimes offer charge-free foreign transactions.
  • Additional cards - many lenders offer additional credit cards that can be used by staff members. This can help to simplify your expenses process. Employees can charge expenses directly to the company credit card rather than claiming them back later. Some lenders allow you to cap the spending limit separately for each card by day, week or month.
  • Easy to track expenses - many lenders include software to allow you to track expenses. Employees can upload receipts, tag expenses and allocate them to different categories, reducing admin time. You can run online reports on expenses to help prepare year end accounts.

Cons

  • Expensive - interest rates on business credit cards are relatively high. This is because they are flexible and usually unsecured so lenders are taking on a higher risk of non-payment.
  • low credit limit - business credit cards have a credit limit of up to £10,000 so they are not a solution if you need a larger business loan. It may be possible to apply for a bigger credit limit once you are an established customer.
  • Personal guarantees - many lenders ask for personal guarantees when you apply for a business credit card. This means that the business owner is personally liable for repayments and fees if the business fails. If you don’t keep up repayments this could also affect your personal credit score.
  • Fewer consumer protections - business credit cards don’t have the same consumer protection that comes with personal credit cards. For example, lenders are allowed to increase interest rates on existing balances on a business credit card. Check your credit card agreement to make sure you understand the terms and conditions.
  • Affects credit score - If your business doesn’t pay the minimum payment then this could affect your business’s credit score.
  • Suppliers may not accept credit cards - some suppliers prefer invoice payment by bank transfer so you won’t be able to use a credit card for all transactions.
  • Easy to overspend - as you often won’t have to pay for purchases for 90 days, it can be easy to let purchases build up and not keep track of what you are spending.

Alternatives to using a business credit card

If your business needs to borrow cash regularly or you need a significant amount of cash then alternative business finance may be more suitable than using a business bank overdraft.

Here are some other types of business finance to consider:

  • Business bank overdraft - this works like a personal bank overdraft. It’s a flexible business loan where you will only pay interest on the amount currently used. You will owe interest straight away rather than having an interest free period.
  • Invoice financing - this loan is based on the value of your outstanding customer invoices. The loan is often repaid once cash comes in from customers.
  • Working capital loan - a flexible loan arrangement to provide cash to cover short-term borrowing needs.
  • Small business loan - this works like a personal loan with an agreed interest rate and repayment schedule.
  • Bridging loan - lenders advance cash to bridge a gap between buying one building and selling another. It can also be used for other short term borrowing needs.

How do I apply for a business credit card?

Applying for a business credit card is similar to applying for a personal credit card. Some banks will only offer business credit cards to existing customers. Lenders will check your business and personal credit score as well as looking at your business’s financial records.

Most lenders will also ask to see the following information:

  • Business name and address
  • Personal details of business owners or partners.
  • Financial records or bank statements
  • Details of your business’s annual turnover

Some lenders will ask you to sign a personal guarantee as part of their application process.

Where can I get a business credit card?

Many banks offer business credit cards, although some won’t let you apply unless you’re an existing customer with a current account. Here are some providers:

Frequently asked questions

Most lenders require you to personally guarantee your business credit card. This means you’ll be personally liable if your business can’t repay the loan. Your personal assets may be at risk if your business runs into financial difficulty.

Take a look at the terms and conditions in your credit card agreement to check if you are signing up to a personal guarantee.

If you’re the main account holder for a business credit card, then how you use it will affect your personal credit score. If you are an employee and you use a business credit card then this is unlikely to impact your credit rating.

Business credit cards are designed for business rather than personal use. Most lenders don’t allow you to use your business personal card for personal spending. Make sure you understand the terms and conditions of your credit card.

If you’ve got a bad credit rating, it will be more difficult to get accepted for a business credit card. However, it may be possible to get a credit builder card designed for businesses. You may be offered a lower credit limit and a higher interest rate than someone with a good credit rating.

It’s usually a good idea to work on improving your business credit rating before applying for a credit card. This is because being refused a credit card will show up on your credit score and could make it even more difficult to get business finance in the future.

Having a business credit card can help your business to build a better credit rating. You need to make sure you pay your credit card bills on time to prove you are a reliable borrower. If you don’t pay your bills then this could have a negative impact on your business and personal credit rating.

You’re allowed to deduct business credit card interest as an allowable expense on your tax return. Speak to your accountant as the rules are complicated. If you’re using cash basis accounting, for example, you can only claim a maximum of £500 in interest and bank charges.

Typical business credit card interest rates are around 20-30% APR, although you may be offered a higher or lower rate depending on your business turnover and credit score.

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