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Small-Business Credit Card Vs. Corporate Card: Is It Time to Move Up?

Business Credit Cards, Credit Card Basics, Credit Cards
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Small-Business Credit Card vs. Corporate Card

As your small business grows, your management needs will, too. You’ll have more employees, more invoices to pay, more accounts receivable. And you may have too many authorized users on your small-business credit card. At that point, it may be time to change from a small-business card to a corporate credit card.

Most entrepreneurs have a sense of the difference between personal and business credit cards. But the distinction between small-business cards and corporate cards — and the right time to move from one to the other — is less clear.

small-business credit card, such as the Capital One® Spark® Cash for Business or the Ink Plus® Business Credit Card, has a lot in common with a personal credit card. When you apply for one, the issuer typically will check your personal credit, and you are personally responsible for repaying debt on the card. If your company has a separate business credit file, the issuer will check that, too.

Many small-business cards have rewards program for spending on common business expenses, such as office supplies and telecommunications services. Most issuers allow account holders, usually the business owner, to get free authorized-user cards for employees.

Employees, however, aren’t on the hook for the bill; the account holder is. Having many employees as authorized users is a risk to your personal and business credit, even if you set spending limits on the cards.

Corporate card: Who is liable?

Enter the corporate card. A corporate, or commercial, card is generally used by businesses with annual revenue north of $4 million that process many transactions and have many people authorized to spend on behalf of the company, says Rajsaday Dutt, head of product strategy for commercial cards at Capital One.

Liability in a corporate card program is either individual or corporate:

  • Individual liability: Employees must pay all charges on the card, and they get reimbursed when they file an expense report. The issuer will check employees’ credit before giving them a card, but this check is a “soft pull,” meaning it doesn’t affect employees’ credit scores. The big drawback of individual liability is that employees have to wait to be reimbursed for any charges they make on behalf of the company.
  • Corporate liability: The company is responsible for paying the bill. The issuer doesn’t check employees’ credit. Employees file expense reports so the company can reconcile charges with the card statement each month, but the employee doesn’t have to pay the bill upfront.

Individual liability programs are less common than in the past, Dutt says. “Some very large companies worry that employees will have a large credit line and use it for personal expenses and then they will walk away from it, and the company will be left holding the bill. So they issue a card where the individual is liable,” he says. But, he adds, “this is not the usual practice nowadays.”

Benefits of a corporate card

Going with a corporate card program has several benefits for a business owner.

REDUCED personal risk

Corporate cards are issued on the basis of the company’s financial strength, not the owner’s personal finances. “Generally, a commercial card requires you to have solid financials, a strong balance sheet and profit-and-loss account, and very good liquidity and cash flow,” Dutt says.

While you would probably give small-business cards only to employees you trust, you still have to be on the lookout for fraud, which would affect both you and your business. A corporate card won’t prevent fraud, but it will protect you personally.

better reporting

Corporate credit card programs offer businesses robust ways to track expenses. Your card-holding employees typically will be able to file their expenses electronically, saving you time checking reports. Also, it will be easier to for you to see where and how your employees are spending your company’s money.

ability to set LIMITS

Setting rules for spending is crucial for business success. Corporate card programs let managers set limits on the amount of spending and the categories in which employees can spend. Many companies forbid personal use of a corporate credit card.

Benefits for employees

No effect on personal credit

Because the company is liable for payment, issuers don’t report corporate card activity in the employees’ name to the credit bureaus. Also, employees don’t have to undergo a credit check. With small-business cards, employees are authorized users, and their activity is reported to the credit bureaus. Plus, the card issuer checks employees’ credit.

No personal liability

Whether it’s a small-business card or a corporate card with corporate liability, ultimate responsibility lies with the business, not the employee. Employees’ responsibility is to file their expense reports on time so the employer can manage the credit card.

No waiting for reimbursement

With corporate liability rather than individual liability now the standard, employees with corporate cards aren’t required to essentially lend their employers money by paying business expenses out of pocket, then waiting to be reimbursed.

When should you think about changing?

If you’re a business owner thinking about a corporate card program, Dutt says to ask yourself whether these situations apply to your business: “If they’re doing a lot of batch process payments, a very high volume of transactions or if they have a lot of people spending and want to keep control, then they should very seriously look at a commercial card.”

Ellen Cannon is a staff writer at NerdWallet, a personal finance website. Email: ecannon@nerdwallet.com. Twitter: @ellencannon.