How Do Business Credit Cards Work?

October 26, 2020

A competitive business is always looking for ways to increase spending flexibility. Too often, that flexibility comes in the form of business owners using personal cards. In fact, over a third of small businesses have utilized personal credit in recent years. For growing companies, business credit cards are a much better way for executives and managers to track and control spending across various departments. Not to mention, they streamline accounting and expense approval workflows significantly for the business owner.

But how do business credit cards work? This guide will help you understand everything you need to know about business credit cards, including:

  • What a business credit card is and how it works
  • Why companies choose to use business credit cards
  • What are the best business credit card features

What is a Business Credit Card and How Does it Work?

A business credit card is a line of credit extended to a business by a third-party lender (typically a bank or financial institution). This line of credit functions as a preset amount of money that is loaned to your business each month and can be used as a payment mechanism. In exchange, you have to repay the credit with interest on top.

To begin, a business must apply and then be approved for credit. The creditor provides purchasing power by fronting funds, up to a certain limit. The business uses these funds to pay for business operating expenses and must pay back the debt accrued within a given time period, known as a billing cycle. Any balance that’s not paid back within a billing cycle is subject to interest.

Business credit cards are similar to personal credit cards and work much in the same way.

However, rather than providing the line of credit to a private individual, a business credit card enables a business owner or employees in a company to make purchases. Regardless of which employee uses the business credit card, the company is responsible for paying back the balance. This works roughly the same for every type of card issuer that offers a business credit card.

Different Business Credit Card Types

There are a few types of business credit cards to choose from:

  • Business credit cards – As in the basic definition outlined above, conventional business credit cards enable a company to pay for a purchase over an extended period of time. However, the balance carried each month will have compounding interest applied to it by the business credit card issuers.
  • Business charge cards – A charge card functions more like a short-term business loan. No balance can be carried over month to month, so the total balance is due by the end of the billing cycle. Because of this, no interest accrues (or compounds) over time. These are often also referred to as corporate charge cards, or corporate cards.
  • Business debit cards – A card that’s tied to the business’ primary bank account. These do not come with a line of credit and instead all transactions have to be funded by what’s in the primary account.
  • Business prepaid cards – A card that has a preset amount of money loaded in. This is also not considered a line of credit because the business needs to pre-fund this card.

Why Do Companies Use Business Credit Cards?

According to a recent federal study, over half of small businesses across the U.S. depend on some form of credit to fund their business operations. This probably doesn't come as a surprise.

Business credit cards offer competitive advantages, like high spending limits, that increase a company’s purchasing power and expense flexibility. Rather than delaying a purchase until sufficient funds are available, a line of credit allows a business owner to pay for it upfront, then repay the balance over a set period of time.

This provides an immediate injection of capital into the company, and prevents employees from having to pay out of pocket for business expenses. That said, many businesses use credit cards not for the credit, but for the convenience (in paying vendors) and transparency (in monitoring and tracking spend) it brings.

Business Credit vs Personal Credit Cards

Personal credit cards can be used for business purposes, and in many cases they are. In practice, employees or executives often pay for business expenses with personal credit cards, and then seek reimbursement from the company at a later date.

While it’s a fairly common business practice, it’s not advised. Why?

  • Late expense reports and unapproved expenses can cause accounting delays, which slow down the reconciliation process. On top of that, there are further operational costs tied to the expense approvals process.
  • Slow reimbursement turnaround can cause employee frustration.
  • Employees essentially act as a bank proxy by loaning money to the business. This can create an uncomfortable dynamic.

With all these downsides, why do businesses choose to leverage personal credit? Often because of perceived flexibility and ease of payment in the moment. But compared to personal credit, business credit cards offer a better alternative with fewer risks and many additional benefits.

Consider, for example, if each employee was issued a business card. As the business owner, you’re empowering your employees to spend, but with controls over that spending. All the while you remove the burden associated with expense reports, as employees will no longer need to seek reimbursements.

Credit Limits and Simplicity of Business Credit Cards

These aren’t the only benefits of business credit cards. For one, the credit limit for businesses tends to be higher than those on personal ones. This is due to the credit limit being calculated according to income and creditworthiness, which are likely to be higher for a business than an individual employee. A higher credit limit allows a small business owner to cover upfront expenses instead of waiting until the funds are available.

Plus, when compared to business loans, a small business card is typically faster and easier to apply and qualify for. This enables businesses to spend as they see fit, without having to go through the loan approval process every time they have a large expense.

What Are The Best Business Credit Card Features?

There are many features built into business cards, such as rewards programs and partner promotions. Many business credit cards even feature travel programs, cash rewards, or other targeted spending initiatives that reward certain types of expenses.

However, the best business credit card features help companies save and control spending.

For example, some card platforms have add-ons like automated expense management, real-time visibility, and accounting integrations. Although these add-ons might not be available in normal business cards, they are features of smart corporate cards, like Ramp.

With a smart card, transactions can be documented in the general ledger automatically and approved in seconds, creating efficiencies and providing real-time visibility into the company’s finances. This also gives managers and executives control over who is spending, on what, and how much.

Integrating these features into accounting and messaging software (like Quickbooks and Slack) further streamlines the accounting and approval work company-wide.

Rewards Programs: Points, Miles, and Cash Back

Another differentiator of small business cards is the rewards programs and whether they offer points, miles, or direct cash back.

Points and miles are very attractive at first glance. But when you dig deeper into the actual exchange rate earned, it becomes more like digging for fools’ gold:

  • Points (and miles) are often earned and cashed in at complicated, non-corresponding rates. For every $100 spent, you may gain 5,000 points, but those 5,000 points could be valued at $1. This essentially gamifies the points system, where having “tons of points” is exciting, but worth next to nothing.
  • Points systems typically only apply to purchases in certain rotating categories, and there are often short windows in which they may be earned or redeemed. This limits the freedom and flexibility of companies looking to maximize their savings. It also incentivizes the company to cash in the points’ value to purchase things they may not need, otherwise the points may go to waste.
  • Some points systems are also often limited at a certain maximum dollar value or point amount; this limitation further constricts companies’ ability to maximize the rewards’ value.

By contrast, a flat cash back system is generally a simpler, better alternative for a business credit card. For every dollar spent, you see guaranteed returns.

Power Your Business with the Right Card

Business credit cards offer increased financial flexibility by enabling businesses to spend on their own schedule. They also provide other benefits which enable premium savings and spend management.

To that end, Ramp’s corporate card and spend management platform comes with:

  • Automated receipt matching and transaction logging
  • Optimal control and real-time visibility
  • Unlimited 1.5% cash back on all purchases

Best of all, Ramp offers the best business credit card features completely free of charge to startups and small businesses—no initial or annual fees and 0% interest. Issue as many cards as you need for your employees to better control company expenses, and let the robust platform find ways to save money for your business.

Sources: Small Businesses Often Rely on Credit Cards, Fed Study Finds.

Investopedia. Using a Business Credit Card.

Motley Fool. How Business Credit Cards Work.

Nerdwallet. 6 Major Differences Between Business and Personal Credit Cards.
Payments Journal. What Percent of Small Businesses Use a Personal Credit Card?

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