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If you’re a small business owner, you’ll know how vital it is that you remain on top of your business finances. You would be forgiven, however, for not knowing all that much about charge cards and how they work.
Although there are some key differences between the two, business charge cards are fundamentally similar to business credit cards. In the UK, charge cards are just not as common or as widely used.
But like credit cards, charge cards can be a hugely helpful tool in a business owner’s arsenal.
Read on to learn more about charge cards and how they could help your business get more bang for your buck.
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What is a business charge card?
Business charge cards are plastic cards that look like credit cards and can be used to make purchases in a very similar way.
With a business charge card, you are required to pay off your purchases at the end of an extended payment period. With American Express, this period can be up to 54 days.
By spreading the cost of a payment – even if only for a month or so – rather than having to hand over the cash up front, business charge cards can help your business with its cash flow.
You can also earn rewards points by spending on a business charge card – just like with some business credit cards.
The key difference, however, between credit cards and charge cards lies in your ability to carry forward a balance – that is, roll over the debt from one month to the next.
When you spend on a business charge card, you must always pay off the balance in full every month. If you don’t, you’ll be charged late fees.
Credit cards, on the other hand, allow you to pay off your purchases over a greater length of time, provided you stay within your credit limit and pay the minimum amount each billing period.
Although credit cards give you the option to spread the cost of your purchases over a longer period of time than with charge cards, you’ll usually be charged interest if you don’t pay your whole credit card balance right away.
This means that with credit cards, it’s always cheaper in the long run to pay your monthly balance in full. If you’re the kind of customer who does this, charge cards work in much the same way as a credit card.
How do business charge cards differ from credit cards?
Charge cards look like credit cards and function in the same way to make purchases. Since charge cards often have some of the same features as credit cards, including rewards and perks, you’d be forgiven for thinking the two terms are interchangeable.
But unlike credit cards, charge cards are specifically designed to be paid off in full each month. Therefore, they don’t have 0% interest promotions and they’re not an option for balance transfers.
If you need either of these features, then a credit card may be a better fit for your business than a charge card.
While credit cards usually come with a pre-set spending limit – which caps how much credit you can use at any one time – charge cards traditionally don’t have pre-set limits.
This does not mean, however, that you can spend without restrictions on a charge card. Charge cards still have limits – they just change automatically based on your usage of the card and your circumstances.
Cardholders can usually check their limit with an app or use the card issuer’s website to find out whether a purchase will be approved.
Since you aren’t accessing a line of credit with a charge card, you won’t be charged interest for using one.
Instead, you are required to pay off every penny you’ve spent on the card by the end of each billing period. If you don’t, expect to be slapped with late fees.
You usually need to pay an annual fee to access a charge card. With credit cards, some providers charge lower fees, while other cards are free to take out. Much of this will depend on your card provider.
Advantages of business charge cards
No preset spending limit
Charge cards generally have no preset spending limit. Of course, the idea of having a card with no predetermined spending limit may sound enticing, especially for big spenders and business owners. But you should always read the fine print.
“No preset spending limit” doesn’t mean “unlimited spending allowed”. It just means the limit changes.
You will still have limits based on your use of the card, payment history, credit record, financial resources and other factors.
Charge cardholders can check their spending limit to find out instantly whether purchases will be approved – either online, through a mobile app or by calling the phone number on the back of the card.
By contrast, credit cards have a set limit. While credit card spending limits can change, depending on your circumstances and how you use the card, they don’t change all that frequently – and they are nowhere near as dynamic as charge card limits.
No debt and interest
With a traditional charge card, you cannot rack up huge debts because you’re required to pay off your charge card in full every month. This also means there will be no interest charges.
Rewards and perks
Charge cards may offer generous spending rewards and built-in perks, particularly for travel. But competition among credit card issuers has made some credit cards comparable to or even better than charge cards.
If you’re eager to start earning rewards for your business spending, your best bet – as ever – is to shop around and conduct your own thorough research into the financial products available to you.
Impact on credit scores
If you use them responsibly, charge cards and credit cards can both help you boost your business credit score.
One difference is that the scoring models used by credit reference agencies don’t consider charge card balances for a portion of their scoring criteria, called credit utilisation. Utilisation refers to how much of your available credit you’re using at a given time.
Because charge cards have no preset spending limit, and because charge cards are always paid off in full at the end of each billing period, scoring models can’t calculate that ratio.
So one benefit of a charge card is you can spend as much as you like in a given month, and it won’t hurt the utilisation element of your credit score.
Disadvantages of business charge cards
Late fees
If you fail to pay your charge card’s monthly balance in full, you will incur a late payment fee.
Most credit cards will charge late payment fees, too – though not all do. The difference is that with credit cards, you can make the minimum payment to avoid a late fee.
With a charge card, you will need to pay the whole balance in full, every month to avoid a late payment fee. That makes charge cards less flexible when it comes to making repayments.
Also bear in mind that a charge card issuer can report late payments to credit reference agencies, which could negatively impact on your credit history.
High annual fees
Charge card rewards and perks are likely to come at a price: you typically have to pay an annual fee.
Some business charge card fees are steep, costing hundreds of pounds per year just for the privilege of holding the card.
In contrast, many credit cards have no annual fee, although cards that match the rewards and travel perks of charge cards typically have similar annual fees.
Again, expect to pay £100 or more each year if you want to access top offers from rewards credit cards.
You’ll need a good business credit score
Charge cards generally require good to excellent credit scores, while some credit card lenders will approve you for an account even if your credit score is less than stellar.
Bear in mind that your business will have its own credit score, which is different to the personal credit score assigned to you as an individual.
When accessing business finance, lenders will generally look at your business credit score to get a sense of how risky it would be to lend to your company.
However, if you’re looking for finance as a start up – or if you only have a limited trading or credit history for lenders to consider – your own personal credit score may come into consideration.
» MORE: What is a good credit score?
How to choose between credit cards and charge cards
Regardless of whether you choose to fund your business operations with a charge card or a credit card, it is always advisable to pay off your card balances in full every month.
Failing to pay off the entirety of your monthly balance will result in late payment fees or interest payments, making the cost of finance greater in the long run.
If you do pay off your balance in full every month, charge cards and credit cards really aren’t all that different; the major distinction is that you could have greater spending power with a charge card.
This means you’re probably best off judging the cards on their features and perks, as well as considering which products would be the best fit for your circumstances and your business.
As a general rule, however, credit cards are likely to offer more choice and flexibility than charge cards, both when choosing a card and using it.
And remember, you can always use a credit card like a charge card by paying your balance in full each month.
But if you will use a card for a high volume of spending, always pay off the balance and like the offer of travel perks, a charge card could be the ideal way for you to level up your business finances.
How do I apply for a business charge card?
If you want to apply for a business charge card, start by researching the various charge cards on the market to find the card which is the best fit for your business.
Once you’ve settled on a card, you should be able to apply directly to the charge card provider using their website.
Different providers will have different eligibility requirements, which you must meet if you want to be accepted for a business charge card.
You will typically need to be a sole trader or business owner aged over 18, and you may need to hold a business bank account with certain charge card providers before they will consider your application.
Be warned that your business credit score will be checked as part of your application, and if your business credit score is too low, you may not be approved for a business charge card.
You should also know that if you make multiple applications over a short period, the so-called “hard” credit checks carried out by charge or credit card providers can temporarily hurt your business credit score.
Try to avoid making repeated applications in a short period of time to avoid these searches having an effect on your business credit score
» MORE: Do I need a credit card?
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