Table of Contents
- How to use a business credit card
- The difference between debit cards and credit cards for businesses
- Types of business credit card
- How does business credit card interest work?
- What is APR?
- What is a credit limit?
- What are minimum payments?
- Do business credit cards charge fees?
- [Applying for a business credit card
There are several different types of business credit cards on the market – each suited to different purposes – but they all have one thing in common: they offer a flexible way to borrow money.
For business owners, sole-traders and side hustlers, business credit cards come with some big benefits – including help with cash-flow, purchase protections, and the possibility to earn rewards for everyday business spending.
However, if you’re considering applying for your first business credit card – or you’re wary after building up debt in the past – it’s worth taking time to understand exactly how they work and what costs and risks are involved.
How to use a business credit card
Business credit cards can be used to pay for goods and services in person and online, just like a debit card or any other personal credit card.
Most providers issue contactless cards, so you can pay simply by tapping the card on a card reader. You may also be able to add credit cards to a digital wallet, which gives you the added convenience of paying using a device such as a phone or smart watch.
Credit cards can also be used to withdraw cash from an ATM, but this can be expensive as you will be charged extra interest and fees, usually from the day you make the withdrawal.
This is true of personal and business credit cards. In both cases, using a credit card for a so-called cash advance is rarely a good idea.
The difference between debit cards and credit cards for businesses
While they are generally used in the same way, there is a key difference between business debit cards and business credit cards:
- When you pay using a debit card, you are spending money that’s already in your account
- When you use a credit card you are borrowing money from the credit card company to pay for the transaction. You will then need to repay this money at a later date, either in full or in monthly installments.
Each month, your credit card provider will send your business a statement telling you how much is owed on the card (including any interest and fees) and the minimum payment you need to make by a certain date.
You can settle a credit card balance in a few ways: via the provider’s website or app, over the phone, using your banking app, or by setting up a direct debit.
Unlike debit cards, business credit cards may benefit from various payment protection features. While protections for business credit cards generally aren’t as robust as they are with personal credit cards, your business credit card may have the means of blocking fraudulent activity. You may also be able to refund the cost of stolen or damaged items bought using the card.
Another difference is that business credit cards may also offer rewards for your everyday business spending. This is less common with a business debit card.
Types of business credit card
Business credit cards can be used for more than just making purchases. There are several different types of cards that are designed for specific purposes, including:
- Purchase business credit cards: These cards can come with low or 0% interest rates throughout an introductory period. This makes them useful for making large, essential purchases or meeting unexpected costs without adding immediate cash-flow pressures to your business.
- Balance transfer business credit cards: You can move a balance from an existing credit card to a balance transfer business credit card offering a low or 0% interest rate for an introductory period. Before you apply, check exactly how to transfer credit card balances and take note of any transfer fees you will have to pay, which are usually around 3% to 5% of the balance you’re transferring.
- Travel business credit cards: If your work often takes you overseas, a foreign use business credit card could save you money. This is because, unlike standard credit cards, you won’t be charged a fee when you spend overseas on a travel card. You may also benefit from better exchange rates. However, this type of card usually charges a higher rate of interest, so it’s best to clear your balance as soon as you get back from your business trip.
- Rewards business credit cards: Some business credit cards offer cashback, reward points or air miles when you make a purchase. However, these cards may come with a higher interest rate, which could cancel out the benefit of the rewards unless you clear your balance in full each month.
- Charge cards: While not technically a type of business credit card, charge cards can work in a similar way. Charge cards usually don’t have fixed credit limits, and they typically won’t charge you interest either. This is because you have to to settle the balance in full at the end of each statement period. If you don’t, you’ll be slapped with late fees.
How does business credit card interest work?
Whatever type of business credit card you use, you need to understand how credit card interest works.
Provided you pay off your balance in full before the due date specified in your statement, you shouldn’t need to pay any interest. This interest-free period varies between different providers, but most cards give you up to 56 days from the date of purchase before interest is applied to the amount you borrowed.
Interest is charged as a percentage of the amount you owe, and you can find the exact interest rate on your monthly credit card statement or other documents from your provider.
Providers will decide what interest rate to charge when you apply for a business credit card. As part of the application process, they will run a credit check on your business. They may also consider your personal credit history to help them decide how much of a risk you and your business present.
The better your business credit score, the easier it is to access finance – including business credit cards – on favourable terms.
What is APR?
When you compare and apply for business credit cards, you will see something called the APR, or annual percentage rate. This predicts the cost of using a credit card over one year, taking into account interest charges and standard fees. However, depending on how you use the card, you may end up paying more interest than the APR indicates, especially if you use your card to transfer money or withdraw cash.
Many credit cards also have a variable APR, which means the interest rate could go up or down depending on changing market conditions, such as the Bank of England base rate, or how you use your card.
Some business credit cards come with a 0% interest period, which means you won’t need to pay any interest for the specified period. If you pay off your credit card balance in full before the 0% rate ends, you can avoid paying any interest altogether.
After this period, your provider will start charging interest on any outstanding balance on the card.
What is a credit limit?
A credit limit is the maximum amount of money you can borrow on your business credit card.
Your credit card provider will set the limit when you apply for the card, based on several factors including your business credit history and financial situation.
If your business hasn’t been trading for long, or if your business is very small, lenders may consider your personal credit score as well as your business credit score.
Typically, the lower your credit scores, the lower the credit limit you’ll qualify for – if you qualify at all.
Your credit limit isn’t set in stone and can change over time. For example, you may be offered a higher credit limit if you manage your account well, or it can be limited or reduced if the provider is concerned that you may not repay what you owe.
What are minimum payments?
A minimum payment is the lowest amount you need to pay back to your business credit card each month to avoid late fees and extra charges.
The minimum payment is set by your provider and calculated as a percentage of your outstanding balance plus interest and fees. The percentage you need to pay may vary depending on the provider, but it will usually be between 3% and 5% of your total balance – so your minimum payment will increase as you spend. However, if your balance is low, you may be charged a fixed minimum amount instead.
When you receive your business credit card statement, you will see the minimum repayment due date. You need to pay at least the minimum payment each month. If you don’t, you are likely to face penalty charges, your business and personal credit scores could be affected, and you could lose any promotional offers, such as a 0% interest rate.
If you can, you should always try to pay more than the minimum as this will stop interest mounting up and mean you can clear your credit card balance more quickly.
Do business credit cards charge fees?
Interest isn’t the only additional cost to be aware of when you use a business credit card. Providers may also charge a variety of fees, including:
Annual fees
Many cards won’t charge an annual fee, but some will. This may be true of higher-end rewards cards, for example.
Late payment fees
You will usually get a penalty fee if you miss the payment deadline on your credit card statement.
Overlimit fees
You can expect to be charged if you exceed your credit limit. The provider may also lower your credit limit or ask you to repay your card in full.
Cash withdrawal fees
This will usually be a fixed minimum charge or a percentage of the amount you withdraw. You may also be charged interest from the day you withdraw cash, so you won’t benefit from the standard interest-free period as you would if you made a purchase.
Balance transfer fees
When you move existing credit card debt to a balance transfer card, you might need to pay a fee. This is usually a percentage of the total balance.
Foreign transaction fees
Most providers will charge fees to use a credit card abroad, unless you have a specialist travel business credit card.
Each credit card company has a different fee structure. So make sure you are fully aware of all the fees that may apply before you take out a business credit card.
Applying for a business credit card
Now you understand how business credit cards work, you are in a better position to decide if you should apply – and which business credit card to choose.
When you apply for a business credit card, expect to be asked for details about your personal and business finances.
Your prospective lender will look at your business credit score (and possibly your personal credit score as well) to see how you have managed credit in the past. This check will be visible on your credit history, and it can damage your business credit score if you apply for several credit cards in a short period of time.
For this reason, it’s a good idea to see which cards you are eligible for before you make a formal application. In order to do this the provider will run a soft credit check – which won’t affect your credit scores – to see what deals they can offer you. You can then find out the business credit cards you are most likely to qualify for, reducing the chances of having your application rejected.
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