Thinking about getting a credit card for your business? There are plenty of advantages to having and using a business credit card--but have you considered a business charge card instead?
Let's back up a minute. Just about everyone knows about credit cards, but charge cards aren't nearly as common. Let's take a look at the differences between business credit cards and business charge cards--and why that matters for your business's finances.
Business Credit: It's Nothing Personal
Getting a business credit or charge card lets you do two important things:
1. Build business credit
The sooner you can build up your business credit, the sooner you get to stop relying on personal credit for financing. While startup lenders might not care as much, bigger lenders and banks will want to see established business credit.
This also includes untying your personal and business financials. While it's okay for your financials to mingle in the beginning, you should aim to separate them as soon as possible. This will simplify your bookkeeping for tax season--and again, potential lenders don't want to wade through your personal expenses.
2. Cash flow cushion
A business credit card or charge card gives you access to capital when you need it--even if it's not in your pocket or register at the moment. Whether or not you also have other lines of credit or financing to help you out, a business credit card or charge card brings simplicity and convenience to your business purchases.
With those two big arguments in favor of getting a business credit card or charge card--plus the rewards programs, high credit limits, and ease of making online purchases--let's take a look at the differences between credit cards and charge cards.
Business Credit Cards
In terms of business financing, credit cards are pretty ubiquitous. Chances are, you have a good idea of how they work. Let's just go over the basics to contrast them with charge cards.
Credit cards are often called "revolving" credit because you can tap into the well of funding over and over again--as long as you repay what you've withdrawn.
And when compared to a business line of credit, a business credit card tends to be simpler to tap into and more convenient to use for small purchases.
Business credit cards, like all credit cards, come with limits--there's only so much you can spend at once before you'll incur a penalty.
Different business owners have different credit limits, though, because credit card issuers decide your limit based on your credit history, or how reliable of a borrower you've been. The higher your credit score, the higher your credit limit.
With credit cards, you can choose to pay however much you want each month.
If you pay your entire balance off, then you have nothing to worry about: your debt is cleared. But if you pay only a part of your balance, you'll be carrying it over into the next month. You'll have to pay interest on that debt, so this option isn't always a great idea.
This means credit cards offer a lot of flexibility in terms of how you pay off your credit card debt. If you don't have the funds to pay it all off by the end of the month, it's not the end of the world--just a bit of interest.
Business Charge Cards
For the most part, you can think of charge cards as a kind of credit card. Here are the main ways they differ.
Heavy late payment fees
Unlike credit cards, charge cards demand that you pay off your balance in full at the end of each month--there's no balance carrying. (There's also some charge cards that give you 60 days to pay off your balance in full, but the same idea applies).
That's why charge cards come with much heavier late payment fees. If you can make your monthly payments without a problem, then this shouldn't be an issue. But if you sometimes need to carry a balance past a month, a charge card will penalize you heavily.
No interest rates
Since there's no balance carrying with charge cards, there's no reason to have interest rates, right? This goes hand in hand with the previous difference, but it's important to note.
No preset spending limit
That's right--charge cards don't come with spending limits, unlike credit cards. You can use your business charge cards to make large purchases and clear lots of expenses without worrying about a limit. A charge card can be a much bigger source of financing on a monthly basis, letting you spend however much you want or need to.
Hard to qualify for
That said, a charge card tends to be more difficult to qualify for--probably because there's more freedom in how much you can borrow at once. Your credit score will need to be higher to be eligible for a charge card, generally speaking.
On the one hand, you've got repayment how you want. On the other, no credit limit means bigger spending potential.
Either way, a business credit card or charge card will help you smooth over cash flow gaps and build your business credit. Choose the option that makes the most sense for your business.