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The Pluses and Perils of Using a Credit Card to Finance Your Small Business

Feb. 27, 2015
Business Credit Cards, Credit Cards
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When you’re starting a small business, sometimes your expenses may exceed your current budget, and having a credit card can help. Unlike small business loans, plastic is generally easier to qualify for, and many small business credit cards offer competitive rates and generous rewards. But before taking the plunge, you should know the basics of using a credit card to finance your business.

Will my personal credit be affected when I use credit cards for business?

In some cases, yes. But it depends on the credit card, the issuer and the situation.

When you’re a small business owner, you generally have two types of credit: business credit and personal credit. The three major consumer credit bureaus that produce personal credit reports and scores are TransUnion, Equifax and Experian, and the three major business credit bureaus that produce business credit reports and scores are Experian, Equifax and Dun & Bradstreet.

If you have credit lines with vendors, a business loan or a business credit card, there’s a good chance that you have business credit reports and scores.

If your business fails, it will likely affect your credit

Sure, it’s ideal to keep business credit and personal credit completely separate, but for small business owners who use personal capital to secure credit lines, that’s unrealistic.

Small business owners are generally required to sign a personal guarantee for both loans and business credit cards. If your business fails in this case, you’ll be held financially responsible for the debt and it will likely affect your personal credit.

Even if your business doesn’t fail, your credit may still be on the line. Some business credit cards report payments on your personal credit reports as well as your business credit reports. That doesn’t mean you should avoid borrowing money altogether, but you should be aware of the risk and manage your balances carefully.

Should I get a personal credit card or a business credit card?

It’s possible to use either for a business, but it’s important to note the differences. Thanks to the Credit CARD Act of 2009, consumer credit cards  provide more legal protections than business credit cards. These protections prevent issuers from increasing interest rates without notice and charging exorbitant late fees, among other things.

Many major credit card issuers also follow the same protocol for business credit cards even though it’s not legally required. But to stay on the safe side, don’t assume that you have these protections in all cases. Make sure you know the issuer’s policies for before applying for a card to avoid any unpleasant surprises.

Business credit cards come with their own perks, usually including higher credit limits and bigger sign-up bonuses. These incentives can make it a little easier to cover big-ticket expenses when you’re first starting a business. Additionally, these cards make it easy to build your business credit score, which can help you qualify for more funding in the future. Personal credit cards, on the other hand, generally only affect personal credit.

Keep business and personal expenses separate

Whether you choose a business credit card or personal credit card, remember to keep your personal and business expenses completely separate. If you have a limited liability company (LLC), S-corporation (S-corp) or C-corporation (C-corp), you could lose your liability protections if you use business revenue to pay for personal expenses.

Nerd note: Even if you’re a sole proprietor and don’t have these liability protections to begin with, it’s still a good idea to avoid mixing  your business and personal expenses. This way, assessing your expenses won’t be a nightmare during tax season.

What should I look for in a credit card?

Take a look at what you’re planning to charge to your credit card in the coming year and use that to assess what deal would work best for your company.

If you’re planning to finance your entire business with a credit card, there’s a good chance you may be carrying a large balance for a while, and a card with 0% APR or low interest may save you money. And if you’re using alternative loans, crowdfunding or a small business loan to finance the bulk of your business expenses, you may want to get a credit card that rewards you more for smaller, everyday purchases, such as office supplies.

Expand your business

Growing your business may mean you’ll have to put your personal credit on the line. That’s OK, as long as you understand the potential risks. Borrow responsibly and pay your debts back on time, and you’ll thank yourself later.

Claire Davidson is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @ideclaire7 and on Google+.

Image via iStock.