Table of Contents
- [8 reasons to consider getting a business credit card
- 3 reasons why you shouldn’t apply for a business credit card
- What are the advantages and disadvantages of a business credit card?
- Do I need a business credit card to build up a credit history?
- Can I just use a debit card instead of a credit card?
- Am I eligible for a business credit card?
- What are the alternatives to a business credit card?
There are several good reasons to get a business credit card – and one very important reason not to.
A credit card could give your business some extra financial flexibility, and in some cases it could even save your business money.
However, if you don’t manage your business credit card well, there’s a risk of ending up with debt that you can’t afford to repay.
Of course, there are situations where a credit card can be useful, but that doesn’t mean you necessarily ‘need’ one for your business, particularly if you’re already stretched financially or have any doubts about keeping up with the repayments. Read on to find out what to consider before you apply for a business credit card.
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8 reasons to consider getting a business credit card
There are a few scenarios where different types of business credit cards could prove useful, including:
1. To spread the cost of purchases
When faced with a large or unexpected expense, a 0% purchase credit card can work like an interest-free business loan. Since your business won’t need to pay any interest for a set period of time, a 0% card can help ease cash-flow pressures and spread the cost of a one-off purchase.
This can be a convenient and cost-effective way to borrow, provided you can repay the balance before the 0% period ends, at which point you’re likely to be hit with significantly higher interest rates.
Don’t forget even with a 0% purchase card you will still need to make a minimum payment each month or you risk damaging your business credit score and losing your 0% deal.
2. For cheap borrowing
You won’t usually be charged interest if your balance is fully paid off by the end of each statement period. As a result, it’s possible to borrow money in the short-term using a business credit card and never pay any interest for doing so (the exception might be if you make cash withdrawals).
In addition, you can spend using a 0% purchase credit card and, if you’re eligible for a promotional offer, your business may not have to pay any interest on your purchases for a set period of time.
3. For convenience and emergencies
A business credit card could offer a convenient way to pay emergency bills – car repairs, a broken boiler at your premises, or replacing essential business equipment – if you haven’t set aside the cash to pay upfront. (Although if you have small business insurance, you might be covered for all of these eventualities as part of your policies.)
If you’re eligible for a 0% purchase business credit card, you may not even need to pay any interest for a set introductory period, making it a cost-effective way to spread the cost over a few months.
4. To transfer expensive debt via a balance transfer
If your business already has credit card debt which you’re struggling to pay off, switching what you owe to a 0% balance transfer card may be worthwhile. Balance transfer business credit cards work by giving you a set amount of time to pay off the debt without being charged any more interest. In some cases, you can get interest-free terms that stretch for two years or more.
These credit cards can also be used to consolidate what you owe across a number of cards, so your business debt is easier to manage and you have only one payment to make.
A fee is usually charged for each balance you transfer and, crucially, you should try to clear your balance, or look to switch again, before the interest-free, or low-interest, period ends.
When consolidating your debts, it’s worth remembering that it could take you longer to pay off the debt. You may also end up paying more interest if your business doesn’t pay off everything it owes on the card before the low rate ends.
5. To protect and secure your business finances
While business credit cards don’t benefit from the Section 75 protections afforded to personal credit cards, they may still provide your business with some extra financial security.
Business credit cards often have security features to protect against fraud and misuse. You may also be able to get purchase protection to cover the cost of any damaged or stolen items paid for with your card.
6. To boost your business credit score
If your business credit score needs some improvement, or you have not been trading for long, taking out a business credit card and using it sensibly could help.
Repaying your card balance in full each month and not exceeding your credit limit both have the potential to boost your business credit score. But if you miss a payment, or overspend, your business credit rating could easily head in the wrong direction.
7. To avoid transaction fees when work takes you abroad
Most credit or debit card providers apply foreign transaction charges and fees when you spend overseas, whether you’re paying with your card or withdrawing cash from an ATM. These can quickly add up over a few days, making it an expensive way to spend.
So if you’re travelling abroad with work, and want to use a card while you’re away, you could consider applying for a travel business credit card.
A travel credit card typically won’t charge you any additional fees for foreign transactions – and it could also offer a more favourable exchange rate if you spend in the local currency.
When your business trip is over, aim to pay off your balance as soon as you can, as these cards may have a higher APR than other types of credit cards. This means that in the longer term, the extra cost of interest payments could wipe out what you’ve saved in fees.
8. To earn cashback or rewards on everyday business spending
If you use a business credit card regularly, think about exploring cards that reward your business for regular spending. With some rewards business credit cards, you’ll accumulate points which can be exchanged for vouchers or discounts at selected retailers. Air Miles business credit cards let you swap your points for flights, upgrades and car hire.
Alternatively, you can get cash rewards on eligible purchases when you spend using a cashback business credit card. The amount you can earn usually depends on how much, and where, you spend – but don’t fall into the trap of spending just to chase the rewards on offer.
3 reasons why you shouldn’t apply for a business credit card
Despite the many reasons why a credit card might seem right for your business, there are also times when applying for a credit card probably won’t be the best choice. These might include:
1. If you’re struggling to stay on top of your business finances
If you borrow more on a credit card than you can afford to repay each month, you can quickly run up debts you or your business may struggle to repay.
This can be a problem with any type of credit card, particularly if you find it difficult to keep spending under control.
Ideally, you should aim to pay off your entire credit card balance each month. But at the very least, make sure the minimum repayments are easily affordable. Missing a payment, or paying late, can hurt your business credit score, which could limit your access to credit in the future.
Also bear in mind that paying the minimum amount every month won’t be enough to clear the debt, so you’ll also need to think about how you intend to pay it all off at some point – ideally as soon as possible. If you’re making use of a 0% purchase or balance transfer period, you’ll also need to plan how you intend to pay everything back before interest is charged.
2. If you’ve recently applied for credit
When your business applies for a credit card, prospective lenders will check your business credit score. If you haven’t been trading for a long time, or if you’re a very small business, lenders may also check your personal credit score to get a sense of how reliable you are as a borrower.
When searching a credit report, lenders can carry out either a ‘hard’ or ‘soft’ search. ‘Hard’ searches show up on your credit report for other lenders to see. If your business has a credit application rejected after a ‘hard’ search, this can temporarily hurt both your business credit score and your personal credit score.
If a lender sees you’ve made a lot of credit applications in quick succession, they might worry about your financial situation and question the affordability of a new credit card. As a result, your application is more likely to be rejected.
You can always check your business credit score and use the provider’s eligibility tool before you apply. This can give you an idea of the business credit cards you are most likely to be accepted for, which reduces the risk of an unsuccessful application.
3. If you want to withdraw cash
Every time you make an ATM cash withdrawal with a business credit card you’ll have to pay a fee. Typically, you will also be charged a higher rate of interest on the amount you’ve withdrawn – usually from the day you make the withdrawal (and not from the end of the statement period, as with most other card transactions). This is true for business credit cards as well as personal cards.
Using your business credit card to take out a so-called cash advance can also indirectly affect your credit score. If your business needs to access capital quickly, there will generally always be a better option than using a cash advance.
If you do take out a cash advance, try to settle your card balance as soon as possible to keep interest payments down.
What are the advantages and disadvantages of a business credit card?
Benefits of business credit cards
There are several advantages to having a business credit card, including:
- the convenience to buy now, pay back later
- help with cash flow and spreading the cost of purchases
- the potential for interest-free borrowing
- a useful means of covering emergency bills
- the potential for purchase protection
- the potential to boost your business credit score
- balance transfers, which can be used to lower the cost of existing debt
- the potential for cashback and rewards
- potential protection if you lose your card or you’re a victim of fraud
Disadvantages of business credit cards
But watch out for these drawbacks, which include:
- the potential to be charged high interest outside 0% periods, and if you don’t clear your balance
- the potential for debt to quickly grow, especially if you miss payments or pay only the minimum amount
- the temptation to spend money that your business doesn’t have
- hurting your business credit score by missing payments and overborrowing
- potentially high charges for cash withdrawals, overseas use, exceeding credit limit, and missed payments
Do I need a business credit card to build up a credit history?
Having a credit card isn’t essential for building up your business’s credit history, but it can help.
Paying off your balance each month and keeping within your credit limit both demonstrate that you’re a sensible borrower and can help improve your business credit score. On the other hand, missing payments and borrowing too much can negatively impact your business credit score.
Can I just use a debit card instead of a credit card?
If you have money in your business bank account, you might want to consider using a debit card rather than a credit card.
Assuming you don’t use your overdraft, when you use a debit card you’re spending money which already belongs to your business, so won’t incur any extra charges – things like fees and interest.
You shouldn’t be charged for making cash withdrawals with a debit card either, assuming you’re not in your overdraft or using an ATM that charges you for withdrawals.
That said, there can be advantages to using a business credit card over a debit card, including:
- allowing you to ease pressure on your cash flow, perhaps until your business is paid by a customer or client, or when your business faces an unexpected expense.
- the potential to earn cashback and rewards, including Air Miles, for regular business spending.
- certain credit cards can be used overseas at no extra charge, and they may also give your business a more favourable exchange rate.
- protection for purchases and in-built safety features to prevent fraudulent card use.
Am I eligible for a business credit card?
Generally speaking, you can access business credit cards regardless of how your business is structured. There are cards on the market for sole-traders, side-hustlers, business partners and limited company directors.
Eligibility requirements vary from one provider to the next. Lenders will typically look at the financial situation of you and your business, and your credit scores, before deciding whether you’re eligible for a business credit card.
Expect to be asked for information about yourself and your business. You’ll need to be aged 18 or over and a permanent UK resident to be considered for a card.
You may also need to be earning a minimum monthly income, and you may need a business bank account. Some lenders could ask for a personal guarantee. Like many of these requirements, this could vary depending on your circumstances and the requirements of the card you want.
Before you apply, consider checking your business credit report so that you can spot any errors.
Providers may also offer an eligibility checker, so that you can see if you’re likely to qualify for the card before you apply.
What are the alternatives to a business credit card?
A debit card might be an alternative to a business credit card if you have funds available in your business bank account. But if your business needs to borrow money, there are other options besides business credit cards you might want to consider.
If you have a business bank account, you’ll also usually have an overdraft you can dip into – usually in return for paying an arrangement fee.
If you need to borrow a larger amount or for a longer period of time (longer than the interest-free periods available on purchase credit cards),you could consider taking out a business loan.
If your business is in need of capital quickly, then invoice financing could also help. For a fee, you may be able to release a portion of the value tied up in your business’ unpaid invoices.
In all cases, interest rates, charges, flexibility and how long you expect to need to borrow can all be important in determining which option is best for your business.
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