Last Updated on December 21, 2022 by Selina Parker
Business credit cards are a blessing and a curse. They allow you to spend money on your business without carrying cash around, but they also have disadvantages that can cost you long-term.
The previous article tackled the ten benefits of using a business credit card. The benefits mentioned were improved credit scores, reduced cash flow problems, and increased access to financing. Any business owner should consider these benefits when choosing a credit card.
However, there are also disadvantages to using a business credit card that you need to know before signing up for one. In this article, we will explore the pitfalls of credit cards for businesses and how to avoid them.
PITFALLS OF CREDIT CARDS FOR BUSINESSES
The convenience and ease you experience with a business credit card come at a price. Most business credit cards have higher interest rates than a business loan or personal credit card. If you don’t pay your balance in full every month, you will be charged more interest and pay more for the purchase overall.
Furthermore, suppose your company doesn’t have a method to track credit card usage regularly and carefully. It might be simple to unintentionally overextend the business financially by going over its credit limit or incurring late fees and increasing your credit card debt.
PERSONAL CREDIT ISSUES
Many business credit cards require a personal-liability agreement, meaning that the cardholder is personally responsible for any charges made on the card. You need to provide your social security number to qualify and your previous credit history.
Suppose you have a poor credit rating, adverse payment history, or carrying high balances on other personal cards. In that case, this could negatively impact your ability to get approved for a business credit card and lead to higher interest rates.
It also means that any late or missed payments on the card will reflect on the individual’s credit report and may cause an inability to borrow money.
Applying for a business credit card is not always an easy process. Most business cards require a detailed application with specific questions to determine eligibility.
If you are in the middle of starting up your company, don’t have all its documentation ready, or haven’t filed for your DBA yet, this could be not easy to do.
On top of that, you will have to provide these requirements to get approved:
- Business and personal bank statements
- Business and individual tax returns
- Recent profit and loss (P&L) statements
- Business documents
- Resumes for leadership
Business credit cards are also at risk of fraudulent activities due to stolen card numbers. Keep your account safe by monitoring your account activity and promptly reporting any unauthorized charges.
It’s also critical to ensure that those permitted to utilize the card do not use it for personal purchases and take precautions when making internet transactions to avoid being hacked.
It would help if you also enforced stringent policies surrounding who is eligible to use the card and what constitutes an authorized purchase.
Small business credit cards do not have the same level of protection as some other credit cards. Many credit cards, for example, will not give the same level of secured services if you dispute billing mistakes or need to make product returns.
Reviewing your credit card policy segment is critical before signing up for a business credit card so you know what to expect if something goes wrong.
FLUCTUATING INTEREST RATE
Unlike with loans or a fixed line of credit, the interest rate on a business card can change. Depending on how you use and manage your account, the credit card company that issued it might alter its interest rate.
As a result, it’s in your best interests to be familiar with how rates operate and how they may fluctuate so that you will not be surprised.
TAKING OUT A CASH ADVANCE
Taking a cash advance on your credit card is perhaps one of the most dangerous things you can do with your credit card. Interest begins accruing on the amount of money you withdraw as soon as you make the withdrawal — there’s no grace period like there is for regular purchases. You’ll also have to pay a cash advance fee, up to 5% of the amount.
HIGH PRICED FINANCING
Business credit cards are an expensive option for financing. They tend to have higher rates than other forms of credit, such as personal loans or business lines of credit. You even have to pay a high annual fee, cash advance fees, balance transfer fees, and others, making it expensive.
For this reason, it is essential that you carefully consider whether the upfront benefits are worth the disadvantages before opting into a business credit card program by reading the fine print from the credit card issuer.
Credit cards are highly beneficial for businesses and help you manage your expenses. If you do not correctly utilize the card, it can lead to disadvantages that will jeopardize your business at some point down the line.
If you pay off your credit card statement balance in full by the due date, you do not have to pay interest or anything else beyond the annual fees, which could also result in a positive credit history.
When used correctly and with caution, a credit card for businesses is an excellent way of managing expenses over using a debit card.
Now that you know the disadvantages of paying off credit card balances, reviewing the balance transfer fee policy and other charges, and using your credit card responsibly.
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ABOUT THE AUTHOR
“What began as a life and career coaching services company to aide entrepreneurs through the early-stage challenges and tough transformations of starting a social venture has evolved over the years to include mergers and acquisitions, organizational consulting, and business growth advisory services to mission-driven organizations that strive to improve access to basic physiological, safety, and security needs while increasing their profit margin. Clients include founders and organizations with the purpose of addressing deficiencies in delivering quality healthcare and mental health services, sufficient employment, access to clean water and air, safe shelter, adequate food, and more.”