From the January 1997 issue of Startups

Few small-business owners would argue that pulling out a credit card is sometimes the only way to pay for a necessary operating expense. What many business owners don't know, however, is that the plastic they pull out doesn't have to be a personal credit card--and it probably shouldn't be.

"According to our research, many small-business owners aren't aware of their options when it comes to credit cards," says Mindy Chanaud, business-card product manager for First USA Paymentech Inc. in Dallas.

Rather than use one of the corporate cards available, many small-business owners pull out their own personal credit cards, but that's not necessary or even advisable, says Chanaud. There are a variety of credit cards specifically created for small-business owners that enable them to keep personal and business finances separate.

In the last couple of years, many large creditors have started offering credit cards targeted at small-business owners.

American Express recently launched their first-ever revolving corporate credit cards to meet the needs of small-business entrepreneurs seeking more extended credit, says Ernie Berger, senior vice president of small-business services marketing for American Express Inc. in New York City. For more than 10 years, the American Express pay-in-full Corporate Card has served the small-business market.

Why You Need a Small-Business Credit Card

There are many benefits to having a small-business credit card. A separate business credit card legitimizes your business in your own eyes, and in those of your customers and vendors. "It's a prestige and ego thing," says Chanaud. "Instead of using personal funds, you use a professional-looking card that has your company name embossed on the bottom."

One of the main reasons that many small-business owners like company credit cards, though, is the ability it gives them to streamline records and bookkeeping. By having a credit card to use exclusively for business, "you don't have to worry if an expense was personal or business," says Berger. "A lot of accountants are encouraging customers to use corporate cards so there is no confusion at tax time as to which expenses go where."

Most small-business credit cards include quarterly management reports that summarize expenditures by category, which makes bookkeeping and expense analysis even easier.

Many business credit cards also allow access to products and financial options that large corporations have, such as independent lines of credit and discounts on car rentals and hotels.

Chanaud points out that another often-overlooked benefit of a small-business credit card is that the annual fee and interest are tax-deductible--an obvious advantage when every penny counts.

What Lenders Look For

Most small-business credit card lenders will tell you it's not the size of your business that counts when they consider you for credit. "Size is not the issue," says Berger. "Over half of our corporate card users have only two or three employees. The issue is payment history. We look at the owner's personal and business credit history."

Defaults on payments, serious delinquencies, and any unresolved judgments or other derogatory information will seriously hamper a small-business owner's ability to get credit.

"Although we require that a company has been in business for about three years, the key thing we look for is a good credit record," agrees Chanaud. "We look most closely at the principal owner's credit history."

What You Should Look For

Although many of the business credit cards currently available are similar, no two are exactly alike. Find one that suits your situation by choosing carefully.

"Even before you go shopping for a card, sit down and prioritize your needs," says Chanaud. "If low rates are more important than a lot of features and benefits, then look for the cards that offer the lowest rates. Or, if you decide you want features and benefits, make sure they actually fit your specific needs." A card with travel benefits won't do you much good if you rarely travel. Also, take a look at samples of the quarterly reports, suggests Chanaud. "See if they have information you can actually use," she says.

When choosing a card, keep the following additional considerations in mind:


  • Look closely at the Annual Percentage Rate (APR). Interest rates can vary greatly. Some companies have a fixed rate, while others offer a specific rate plus prime. The prime interest rate is currently 8.25 percent. Although the prime interest rate doesn't change often, it can--which makes your interest rate subject to change. It's a good idea to educate yourself on what's available, as a few percentage points can make a big difference in what you'll end up paying for your credit.


  • Consider annual fees. Some companies charge an annual fee per card, which may be cost-prohibitive if you intend to distribute cards to several employees. Other issuers have no annual fees at all.


  • Compare grace periods. "The grace period applies to purchases only," explains Chanaud. "It is the period during which there is no interest charged, from the statement date until the due date. In reality, this means that from the date of purchase to the date that the statement is cut through the due date, there are no finance charges. At a minimum, it is 25 days, but conceivably, it could be twice that, depending on your date of purchase and the cycle cut. Most small-business credit cards offer a 25-day grace period. The longest grace period is the best."


  • Check out maximum credit limits. You may not need $100,000 in credit now, but as your company grows, the need for more credit is likely to become an issue. Choose a creditor that will allow you to expand as needed.

If you will be distributing cards to various employees and would like to control and limit spending, you will want to choose a company that can put different credit limits on each card. Some companies, like Wachovia, are able to apply a daily spending limit to each card, and they can even restrict at which merchants the card can be used.


  • Protect yourself. Make sure the card you choose has a waiver of liability insurance, which protects you from misuse of the card by terminated employees.


  • Consider the cost of added features. Some of the bonus features, such as airline-mileage programs, charge a start-up and a yearly fee. Before signing up, make sure these are programs you will actually use.

Consider Your Local Bank

Check to see if your local bank carries its own Visa or Mastercard. "Having a credit card from your bank allows you to consolidate business at one place," says Chanaud. "The personal relationship you have with bank employees may also make the application process easier. I get two or three calls a week from bankers who are calling for their clients and want to know what I can do for them."

Your banker is also familiar with both your business and the credit card being offered, and can often tell you if the product meets your needs.

Julie Bawden Davis is a full-time freelancer who writes for a variety of national and regional magazines.