Business credit cards offer small-business owners a number of benefits — they keep personal finances separate from business finances, frequently come with rewards and often offer a higher credit limit than a personal credit card.
The cards have their downsides, too, including the risk of running up unpaid debt — for which the small-business owner is likely personally liable. But for quick, convenient access to capital, they’re hard to beat.
Here are a few tips for small-business owners thinking of applying for a business credit card.
1. Check your credit reports.
In addition to increasing chances your application will be approved, an excellent credit score can help you get a higher spending limit and lower annual percentage rate (APR). A simple way to improve your score is by checking your credit reports for accurate and up-to-date information.
Consider: One in five Americans identified mistakes on their reports, according to a 2013 report by the Federal Trade Commission.
You can get one free credit report each year from each of the three major credit agencies (Experian, Equifax and TransUnion) at AnnualCreditReport.com, or by calling (877) 322-8228. If you’ve already established credit with your business, you can also get your business credit report at Dun & Bradstreet.
If you see any information that looks wrong — such as accounts that don’t belong to you or late payments that you believe were made on time — you can dispute them with each credit bureau.
2. Pay off debts.
Paying off debt will lower your credit utilization ratio, or the amount of credit you’re using in proportion to the spending limit. For example, if you have a credit card with a spending limit of $10,000 and a balance of $8,000, your utilization ratio is 80%.
Ideally, it’s best to keep your credit utilization below 30%, and that’s for individual accounts as well as overall available credit.
Remember, your personal credit score can suffer if you’ve run up business debt on your personal credit card, says Jane Rich, associate state director of the Indiana Small Business Development Center.
Small-business owners just should not use personal credit cards for business debt, Rich says, especially if they have a separate legal entity for their business: “It can get really messy.”
3. Make on-time payments and cut back on loan applications.
Your payment history makes up 35% of your credit score, so you want to avoid late or missed payments.
“If your business is over-leveraged, you have late payments, you are not established, and they can’t find your business easily,” it’s unlikely you’ll be able to get a credit card says David Sussman, chief executive of Valcor Worldwide, a business consulting company.
You also don’t want to go out and apply for numerous loans before applying for a credit card. Multiple credit inquiries in a short period of time can drag down your credit score, as new credit determines 10% of your score.
4. Provide accurate information.
All the information you are providing on the credit card application should be 100% accurate, Sussman says.
“They are going to look you up to make sure you are a good risk” and errors can trip you up, he says. “If there’s a problem with the address, phone number or income you list — they may check that against your records.”
5. Ask only for what you need.
Requesting a high spending limit is risky. Sussman recommends smaller businesses start out with a $5,000 or $10,000 limit and after six months request an increase (assuming you’ve been making your payments on time).
However, you should keep your credit utilization ratio in mind. If you you know your business expenses will regularly exceed 30% of a $5,000 spending limit, for example, it’s reasonable to ask for a higher limit.
Get a fairly clear idea of what you’re looking for in a business credit card before applying. If you hit the road often for business, for instance, travel rewards are probably more appealing than cable or Internet rewards. If you want to save on interest costs, a card with a long 0% intro period may be more attractive than one without a promotion.
To get more information about funding options and compare them for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email:Steven.N@nerdwallet.com. Twitter: @StevenNicastro.
Image via iStock.