When it comes to managing your business finances, a business credit card can be a valuable tool. However, before you swipe that card, it’s crucial to understand the terms and conditions attached to it. Many people rush into signing up for a business credit card without fully realizing how these terms can impact their financial health. Let’s break down the key points you need to know to make the most out of your business credit card while avoiding common pitfalls.
1. APR (Annual Percentage Rate)
One of the first things you should check when considering a business credit card is the APR, or the Annual Percentage Rate. This is the interest rate charged on any unpaid balances carried over from month to month. Understanding the APR is critical because it directly affects the cost of borrowing on your card.
Business credit cards generally have higher APRs compared to personal cards. If you often carry a balance, the interest can add up quickly. In fact, some cards may offer an introductory 0% APR for the first 12 to 18 months, which can help businesses manage cash flow in the short term. But after the introductory period ends, the APR can jump to a much higher rate, so it’s important to keep track of when that switch happens.
2. Credit Limit
Another essential term to pay attention to is your credit limit. The credit limit is the maximum amount you can borrow on your business credit card. It’s usually determined based on your business’s creditworthiness and financial situation.
Having a higher credit limit can be advantageous, as it gives you more flexibility to cover large expenses, especially for growing businesses. However, it’s important to manage your credit usage wisely. Spending close to or exceeding your credit limit can hurt your credit score and result in high fees.
If you find yourself frequently near your credit limit, consider requesting a higher limit. But be cautious: just because a higher limit is available doesn’t mean you should use it all. Aim to keep your balance low to maintain a healthy credit utilization ratio.
3. Fees to Watch Out For
No matter how attractive a business credit card might seem, it’s important to be aware of the various fees that could be applied. These fees can quickly accumulate if you’re not careful. Let’s go through some common ones:
- Annual Fee: Many business credit cards charge an annual fee. While some cards offer no annual fee, others may charge anywhere from $25 to $500, depending on the card’s benefits. Generally, cards with higher fees offer more perks like higher rewards rates or premium business benefits.
- Late Payment Fee: If you miss a payment, expect to be hit with a late payment fee, which can range from $25 to $40. Worse, a late payment could also hurt your credit score, making it harder to access credit in the future.
- Foreign Transaction Fee: If your business involves international travel or purchases, a foreign transaction fee could add up quickly. This fee typically ranges from 1% to 3% of the transaction amount. Look for a business credit card that doesn’t charge this fee if you frequently make international purchases.
- Cash Advance Fee: Some business credit cards allow you to withdraw cash using your credit card, but cash advances come with significant fees and high APRs. If you need cash urgently, it might be worth exploring other options first.
4. Rewards and Benefits
Many business credit cards come with rewards programs that can benefit your business. These rewards may come in the form of cashback, points, or miles. Depending on how you use your card, you can earn rewards on categories like office supplies, travel, dining, and more.
When choosing a business credit card, pay close attention to the rewards structure. Some cards offer higher rewards for specific categories, while others provide a flat rate on every purchase. Make sure the card aligns with your business’s spending habits to maximize the rewards you earn.
Cashback is one of the simplest reward structures, where you earn a percentage of your purchases back in cash. This can be especially useful if your business has high, consistent spending. However, some cards may have limits on how much cashback you can earn each quarter or year, so it’s important to review the fine print.
Another aspect of business credit cards worth noting is travel perks. If your business involves frequent travel, look for a card that offers benefits like travel insurance, airport lounge access, or miles for flights. These added perks can significantly lower your travel costs.
5. Grace Period
A grace period refers to the time between the end of your billing cycle and the due date for your payment. During this time, you won’t be charged interest on your purchases, as long as you pay your balance in full by the due date.
For business owners who pay off their balance each month, a grace period can be a lifesaver. It allows you to avoid interest charges while still enjoying the flexibility of using credit. However, if you carry a balance past the grace period, interest charges will apply to your outstanding balance, including new purchases made after the statement date.
Make sure to take advantage of your grace period to avoid unnecessary interest charges. Setting up automatic payments or reminders can help ensure that you never miss a payment and maximize the benefits of this period.
6. Rewards Redemption and Limitations
Understanding how to redeem rewards is just as important as earning them. Some business credit cards allow you to redeem rewards for statement credits, travel, or even gift cards. However, the process for redeeming these rewards can vary between cards, and there may be restrictions on when or how you can redeem them.
For example, some cards might require a minimum amount of points before you can redeem them, or they may have blackout dates for travel rewards. Others might offer a limited time offer, where you can earn bonus rewards for certain purchases within a specific period.
Make sure to familiarize yourself with the terms of redemption to avoid disappointment later on. Check for any expiration dates on rewards points and whether there are any additional fees for redeeming them.
7. Building Business Credit
A business credit card can play a significant role in building your business’s credit score. Just like personal credit, a good business credit score can help you access better loans, lower interest rates, and better terms on future credit.
To ensure that your business credit card helps build your credit, make sure you are making timely payments and not maxing out your credit limit. Over time, responsible use of your credit card can establish your business as a reliable borrower, which can improve your chances of securing future financing.
However, if you’re unsure about how your business credit card impacts your credit, it’s a good idea to check with the credit reporting agencies. They can give you a detailed report on your business’s credit status and how your credit card usage is being reflected.
8. How to Avoid Common Pitfalls
While a business credit card offers a range of benefits, it’s important to avoid some of the common mistakes that can negatively impact your business. Here are a few pitfalls to watch out for:
- Failing to Pay Your Balance in Full: As tempting as it may be to carry a balance to ease cash flow, doing so can lead to high interest charges and debt accumulation.
- Using the Card for Personal Expenses: It’s essential to keep personal and business finances separate. Mixing the two can lead to tax complications and a lack of clarity in your business’s financial standing.
- Not Reviewing Your Statements Regularly: Always check your monthly statement for errors, fraudulent charges, or fees that shouldn’t be there. Promptly addressing any issues can save you money in the long run.
- Not Knowing Your Credit Limit: Constantly spending near or above your credit limit can harm your credit score. Be mindful of how much you’re using and avoid maxing out your credit card.
Final Thoughts
Using a business credit card can be an excellent way to manage your company’s expenses, earn rewards, and build credit. However, it’s crucial to fully understand the terms and conditions associated with the card. By staying informed about the APR, fees, rewards, and payment terms, you can maximize the benefits of your business credit card while avoiding costly mistakes.
Ultimately, a well-managed business credit card can help your business grow by providing flexibility, rewards, and financial security. So, take the time to read the fine print, compare different cards, and choose the one that best suits your needs. Your business will thank you for it in the long run.