Before he got a credit card for his cellphone repair and parts wholesale business iPhillyfixit, founder Corey Bates used PayPal’s small business funding services. Unsatisfied with the delays in getting money, he got a credit card from Citizens Bank.
Getting a credit card for his business was a good move, Bates says, and a smart way to keep on top of his finances as his business grew from an eBay-based side gig he started in 2010 as a high school student to a venture that allowed him to quit his restaurant job, join forces with a new partner and open up a shop in Drexel Hill, Pennsylvania.
In addition to letting him redeem reward points for cash back, helping him keep track of his businesses expenses and soothing tax headaches, the card gives him financing flexibility.
“If you do need to buy something and don’t have the money at the moment, you can buy it and pay it off within the month,” Bates says.
Indeed, business credit cards have much to offer small business owners. But the world of business credit can be confusing territory to navigate. Even those who are savvy about personal credit can be thrown for a loop by these five business credit surprises:
1. It’s tough to truly separate business and personal
One of the main reasons to get a business credit card is to separate your personal and business finances. In addition to making filing taxes and tracking expenses easier, it helps you preserve the liability protections that you get from incorporating your business, says Marco Carbajo a business credit expert and founder of BusinessCreditBlogger.com and Business Credit Insiders Circle. Those protections, or shield, can be pierced if a business owner fails to separate personal and business financial affairs.
But separation doesn’t mean you won’t be responsible for your business’s credit card debts.
“With most small business credit cards, there’s going to be a personal guarantor,” Carbajo says. “The business owner is usually going to supply a personal guarantee for the business credit card, so if the business defaults, ultimately the liability is going to fall on the guarantor, the business owner.”
For example, check out the fine print for the Chase Ink business cards:
In sum, you, as the personal guarantor for the business credit card (like a co-signer on someone’s personal credit card), are on the hook if the business defaults. And that has credit report implications as well: If the business fails to keep up with payments, those delinquencies can start showing up on your personal credit report.
So can you get a business credit card that doesn’t require a personal guarantee? It’s possible, Carbajo says, but it usually requires a long-standing healthy relationship with an issuer.
“Let’s suppose you have a business credit card for which you are the personal guarantor,” Carbajo says. “You’ve built a long-standing and positive relationship with the card issuer since the business has used the card regularly, developed a positive track record of payments and managed its debts responsibly. If you then apply for a different card with that card issuer, there may be an opportunity where no personal guarantor will be required on that secondary card.”
2. Establishing business credit isn’t straightforward
When you get a personal credit card with a major issuer, you know it and its payment history are probably going to automatically show up on your reports at the three major credit bureaus.
In the business credit realm, things aren’t as automatic and clear-cut.
Three major agencies collect credit profiles and produce credit ratings for businesses: Dun & Bradstreet, Experian and Equifax. Each has its own scoring practices. Experian’s Intelliscore Plus score for businesses, for example, ranges from 1 to 100 and takes into account the existence and dollar amount derogatory public records (such as collections, liens and bankruptcies); how quickly you repay your obligations; the number of business credit inquiries; outstanding balances; credit utilization; years in business and size of business, according to Mary Ann Strout, senior product manager for Experian Business Information Services.
Businesses need to be proactive in getting the credit-reporting ball rolling.
“You have to take active steps,” says Steve Strauss, senior USA Today columnist and founder and CEO of TheSelfEmployed.com.
Strauss recommends the following game plan:
- Incorporate to “establish your business as a separate legal entity.”
- Apply for an Employer Identification Number(also known as a Federal Tax Identification Number) from the government.
- Get a D-U-N-S number from Dun & Bradstreet Credibility. Dun & Bradstreet Credibility gives you the unique capability of “activating” your business credit profile. Essentially, you’re making sure Dun & Bradstreet Credibility is listing your business under your EIN. When it does that, it will assign you a 9-digit tracking number called the D-U-N-S number. Some lenders will ask for this number so they can check your business credit with Dun & Bradstreet.
- Apply for credit and other payment accounts from venders using your EIN and D-U-N-S number. “You start using that separate business entity to establish credit,” Strauss says. “You start small by getting your internet and phone service. Then you get a loan from a bank. Then as soon as you can, get a business credit card.” Those vendors and lenders will then start to populate your business credit profiles with whichever agency they report to. If you pay on time, your business credit profile starts looking rosy and the proprietary scores generated by each of those agencies will rise.
There is one complication, however: You don’t know which business credit reporting agency venders and creditors will pull reports from when assessing you. You might have an excellent rating with Dun & Bradstreet, but that won’t help if a vendor is pulling from another bureau that doesn’t have a file for you. Experian Business, for example, requires at least one trade line from a vendor that reports to Experian to generate a report and score, Strout says.
So, can you establish a record with another business credit agency by seeking out a lender that reports to it?
“Yes, but that’s the tough part,” Carbajo says. “Creditors, suppliers and lenders in most cases do not disclose which agency they report to.”
At the end of the day, though, getting a business credit card and paying it on time will help you get solid business credit footing with whatever agency the issuer reports to.
“Credit cards that you’re responsible with and that you repay on time are one of the best things you can do to establish credit,” Strauss says.
That’s exactly what Bates has been doing. In addition to applying for accounts with service providers using his EIN, he’s paying off his card in full every month.
“If I don’t have the cash flow, I don’t buy it,” he says.
3. You don’t have full control over how your business card reports
You’ve got a business credit card, and you applied for it with the business’s federal tax ID. So it will stay off your personal credit reports, right? Not necessarily, Carbajo says. Some cards advertised as business cards report to your personal credit reports. Some cards report to both personal and business credit reports. Others report solely to the business credit agencies.
As you already know, delinquencies can spill over to your personal reports if you’ve personally guaranteed the card. But even regular business credit activity bleeding onto your personal credit reports can be problematic.
“If you have a business credit card, and you have to make a $10,000 purchase on a card, and that shows up on your personal credit reports, imagine the impact that will have on your personal debt to credit utilization, which ultimately impacts your FICO scores,” Carbajo says.
That’s why Carbajo recommends steering clear of business cards that report to personal credit rating agencies. Unfortunately, Carbajo says, cards generally do not disclose that detailed reporting information in their advertising or in the terms and conditions available online.
“It can be extremely frustrating thinking about this,” he says. “…. There are so many different variations to how the credit reporting side of business credit cards works. It’s a lot more complex compared to personal credit.”
One thing a business owner can do, he says, is contact the card issuer directly and find out which credit reporting agency it reports to.
4. Business credit cards don’t have the same protections as personal cards
The CARD Act of 2009 ushered in a variety of consumer protections when it comes to credit cards – and what issuers can and can’t do. However, those protections don’t apply to business credit cards.
Three major provisions of the CARD Act that business credit card holders could miss out on apply to rate hikes on existing balances, interest-free grace periods and payment allocation.
- APR increases: Issuers of personal cards are no longer allowed to hike interest rates on existing balances unless you are 60 days late. With a business card, you still run the risk of getting a rate hike the very next day if you miss a payment (although there’s no guarantee an issuer will do that).
- Grace periods: As for grace periods (the time you have to pay off your balance without incurring interest), the CARD Act requires at least 21 days between a statement being issued and the minimum payment being due. There’s no minimum grace period for business credit cards, but you might find your issuer still gives you plenty of time. The Chase Ink cards, for example, promise at least 20 days after the close of each billing cycle, and Capital One’s Spark business cards give you 25.
- Payment allocation: If you have outstanding balances with multiple interest rates, the CARD Act requires that personal card issuers apply any payment in excess of the minimum to the balance with the highest interest rate. Business card issuers don’t have to do that, which could leave you paying more interest over the long term.
5. Business card issuers still care about your personal credit
For start-up business owners especially, personal credit is the only thing a lender might have to get a credibility read.
“Initially [your personal credit] sure will be checked,” Strauss says. “In the beginning, your personal credit will help establish your business credit.”
Bates can vouch for that. He says he wishes he’d started building personal credit as soon as he turned 18 to qualify for better terms on his first business card.
“They gave me a $1,500 credit line that I couldn’t do much with,” he says. “So it was all for small purchases in the beginning, and I had to rely on my debit card. [The bank] saw my sales, but they didn’t know if they’d be consistent, so they gave me a conservative credit line.”
His credit limit has since been raised twice and is now at $7,000, he says.
If you have poor personal credit, all hope is not lost. If your business has strong annual revenues, issuers will take that into account, Carbajo says. It might even accept a letter of explanation from you about what went wrong with your personal credit.
Still no luck? Both Carbajo and Strauss encourage business owners to look into secured business credit cards, which, just like their personal-card counterpart allow you to secure a credit line with a deposit.
Even as your business credit ranking climbs, it’s advantageous to concentrate on your personal credit. With your credit firing on both your personal and business cylinders, you’ll have more options and likely qualify for a higher credit limit, Carbajo says.
“You can really maximize your funding potential if you have both a strong personal credit rating as well as a strong business credit rating,” Carbajo says.