To run a business, you have to spend money. And in all likelihood, you’ll want to do it with a revolving line of credit. Of the many types of credit cards available, you’ll likely be choosing between a business or personal credit card to manage your business expenses.
If you’re a sole proprietor or an early-stage startup owner, you may be tempted to use a personal card to run your business due to the perceived flexibility. While this is possible, it’s not ideal.
Why is that?
This article will break down the different credit card types, and why using a corporate card for your business is ultimately more beneficial than using a personal card. By the end, you’ll be able to choose the best business credit card for your company.
Here’s a sneak peek:
- Target customer
- Credit reporting
- Credit limits
- Bookkeeping requirements
- Accounting software
#1 Target Customer
There’s a reason why corporate cards exist.
Even though you can use a personal card consumer card for business purposes, they’re not designed to meet your needs as a business owner. Personal cards’ rewards program, signup bonuses, and eligibility requirements are catered toward individuals. Whereas corporate cards create structures that benefit businesses.
This makes sense. A business might not need bonus rewards for spending at grocery stores, whereas an individual might search for a card with this specific rewards program.
To that end, here’s how business credit cards work to benefit a business:
- Rewards – One of the main business credit card benefits is its rewards points. Business cards will often offer rewards points on eligible purchases that better apply to businesses, like travel and office supplies, as opposed to gas or groceries. The credit card issuer will also reward you for spending in categories more typical for businesses, like SaaS.
- Signup Bonuses – Many corporate cards offer signup bonuses that exceed consumer card bonuses. Often, this comes with a high minimum spend in order to receive the bonus. For instance, some cards may offer a 120,000 mile signup bonus if the business spends $15,000 on the card in the first three months.
- Eligibility Flexibility – Corporate cards have varying eligibility requirements. As the main cardholder, if you have a lower personal credit score but a high performing company, you can find corporate cards that only look at commercial credit scores. Alternatively, if you don’t yet have a business credit history, you can find corporate cards that put more stake on good consumer credit scores.
#2 Credit Limits
Credit cards essentially serve as a constantly renewing small-scale loan.
To grow your company, you have to “take out” this loan each month and invest it into resources and labor. From there, you can make money to repay the loan.
And for a business, credit limits (how large a loan you can receive) matters.
To adequately fund your endeavors and grow at a healthy pace, you need to be able to spend money on big-ticket items and a top-notch team. When your line of credit is limited, so is your business.
Corporate cards offer far higher credit limits than personal cards. This distinction is due to the fact that a corporate credit card issuer will determine your credit limit based on your business’s income, which is typically much higher than an individual’s personal income.
A higher credit limit means more spending power and faster growth.
#3 Credit Reporting
Small businesses can sometimes operate within the credit limits of a personal card. The rewards program can even serve them well. However, when it comes time to take out a small business loan, companies that have omitted a corporate card can suffer.
Personal cards report to consumer credit bureaus. Which means using a personal card doesn’t build your business credit history. Without a commercial credit score or business credit history, your business may have trouble staying afloat should an injection of capital be necessary.
As the U.S. Small Business Administration (SBA) notes,
“Insufficient or delayed financing is the second most common reason for business failure. And, since most loan decisions below $100k are automated, the business credit file will often dictate the amount and terms of a loan. For businesses with poor credit ratings, top national banks may increase credit card interest rates on average from 9% to 18% and loan interest rates on average from 8% to 12%.”
Growing your business credit score is essential. And having a business credit score is the first step. For this, the easiest method is to open a corporate credit card. The earlier, the better.
#4 Bookkeeping Requirements
Putting all your business expenses on the same card as your personal expenses presents a few problems. Different types of credit cards require different levels of bookkeeping for financial stability.
For personal cards, as long as you’re paying your balance on time and avoiding those nasty interest rates, you’re good to go. But when it comes to business expenses, however, you want to ensure that you’re accounting for every dollar so that you don’t go into tax season blind.
Not only that, but putting your business expenses on your personal card “pierces the corporate veil,” meaning it shatters the distinction that you made when forming a corporation or an LLC. Piercing the corporate veil exposes you to personal liability, leaving your personal assets vulnerable should a misfortune occur.
Ease of Bookkeeping: Employee Reimbursement Process
As your company grows, so too does your workforce.
Most likely, you’ll have employees making purchases on behalf of the business. Without a robust corporate card program, your employees will be forced to pay out of pocket for business expenses, and you’ll be burdened with a tedious and slow reimbursement process.
The truth of the matter is that expense reporting and reimbursements only invite fraud and frustration, particularly when you rely on a manual expense reporting process.
With a corporate secured card, you can dish out credit cards to your employees that they can use for specific business expenses like meals or a certain project. That way, they don’t have to pay out of pocket, and you don’t have to get lost in a mountain of expense reports and receipts.
#5 Accounting Software
While personal credit cards may come with certain charts and graphs to describe your monthly spending, the analysis they offer is often limited. However, some corporate credit cards feature accounting software that provides a far more detailed view of your company spending.
The best corporate credit cards will offer advanced expense automation software that streamlines bookkeeping and saves you money. Automated expense management can help your business by:
- Eliminating tedious manual processes during expense reporting
- Allowing businesses to close the books quickly and efficiently
- Preventing fraud by streamlining expense approvals and validations
- Providing a top-line view of spending, enabling real-time problem-solving and accounting.
- Identifying redundant service subscriptions and other savings areas.
Choosing the Best Credit Card Type for Your Business
The choice between a business and personal secured card boils down to a few key factors: who it’s designed for, what you get out of it, and what you can do with it. With greater flexibility and visibility, you can grow larger at a faster pace.
And for this, you need a corporate card.
The top five reasons corporate cards are ideal for your business include:
- Receiving signup bonuses and rewards that better align with your business spending
- Reporting to commercial credit bureaus, allowing you to build your business credit score
- Offering higher credit limits, which means more spending power
- Keeping personal and business finances separate, maintaining your liability protections and allowing you to scale
- Wielding advanced spend management software to streamline bookkeeping, prepare for tax season, and prevent fraud
Ideally, you want to find a corporate card that doesn’t charge interest.
Luckily, that card exists. Meet Ramp.
Elevate Your Business with Ramp
Ramp is a corporate charge card and spend management platform that offers the flexibility and spending power of a business credit card, without the volatile interest rate.
For business owners and employees alike, it’s a win-win.
On top of that, you can grow your business by focusing on saving instead of spending. Ramp’s smart card helps you:
- Cut down manual data entry during expense management
- Issue unlimited cards across departments or employees
- Close the books five days faster on average
- Gain full visibility over company spending
- Place dynamic controls over card users
And because everyone loves a cherry on top, you also get 1.5% cash back on all purchases, no exceptions.
Talk to an expert today to find out more.
FDIC. FDIC Consumer News - Fall 2017. https://www.fdic.gov/consumers/consumer/news/cnfall17/interest.html
SBA. Why small businesses should manage their business credit. https://www.sba.gov/sites/default/files/articles/oee_5_simplesteps_brochure_managing_your_credit.pdf