Are Small Business Credit Cards a Good Idea?

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So you have this brilliant new business or entrepreneurial venture. You created a solid business plan, did your research, and are on your way to becoming profitable.

Naturally the next step is to apply for a business credit card, right? Well, maybe not. Business credit cards are not the only option.

According to data from the National Small Business Association, about 42% of small-business owners carry a credit-card balance. Before you jump on the small business credit card wagon, consider the risks listed below.

The CARD Act doesn’t apply to business cards

Per the 2009 CARD Act, creditors have to disclose their fees and interest hikes. However, they found a (sneaky) loophole around this law.

They discovered they could add “business” to their card’s title, giving them free reign to exploit and penalize cardholders, just like they did before such practices were considered illegal.

Unlike personal credit cards…

  • Issuers can change account terms at any time
  • Penalties and fees are basically unrestricted
  • They have higher annual fees

Most cards that are targeted for business or commercial use, often result in hundreds or thousands of dollars in unexpected fees and higher interest rates.

The line of credit can be dangerously high

If you’re new to the business start-up scene, having a high credit limit is very tempting. It can be dangerous to buy the best office equipment and use credit to get your business off the ground.

Taking on too much debt without the necessary resources to back it up, is a formula for failure. Instead, choose to grow with your business and avoid the high credit card limits.

You’re personally liable for the business debt

Almost all business credit cards include a personal liability waiver. Which means, once you open the account and start using the card, the issuer can come after your personal assets for the balance, if the account becomes past due.

This can include charges made by the owner, business employees and any authorized users of the card.

It could hurt your personal credit history

Since you’re personally liable for business debt, if the account becomes delinquent many lenders will inform the credit bureaus.

If your company can’t keep up with the card payments, you might have to dig into your personal savings and assets to keep the account current. Otherwise you risk hurting your personal credit history.

You’re at the mercy of the card issuer

Why do so many companies use small business cards if they’re so risky? Well, sometimes it’s the only option available.

Sadly, it’s much easier to get approved for a small business credit card, than get a loan or find a venture capitalist to invest in your idea. This leaves your business at the mercy of credit card issuers, and that’s never a good idea.

Are small business credit cards a good idea?

Having access to high credit limits, being at the mercy of the creditors and having no other options is a recipe for disaster. Before applying for a small business card, consider cheaper alternatives and resources for funding your business.

Using a credit card can be unwise because you’re promising future income to pay current expenses. Enter into this decision with caution, the risks may out weigh the rewards.

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12 comments

  1. Modest Money says:

    Wow I didn’t realize the card act didn’t apply to business credit cards and I bet most other people didn’t know this either.  Leave it up to sneaky credit card companies to exploit those kinds of loopholes.  I just wonder why they weren’t included in the act.  Why would they decide that consumers need to be protected, but not those operating a business?

    • Carrie Smith says:

      I was wondering the same thing. I don’t know if they purposefully left out businesses or if card companies just found a sneaky way around and exploited it. I didn’t know some of these risks, and I’m sure other small business owners/entrepreneurs didn’t realize it either.

  2. Kevin Yu says:

    I like to think about business credit cards as personal credit cards in disguise.  Almost every single time you have to personally guarantee it, unless your business has been operating for atleast 3+ years typically.  Might be two, but point is, it’s dangeorus! 

  3. This is a great post and a good word of caution to small business owners. I guess the biggest takeaway is to not get a card with a credit limit higher than you could personally pay off if  you had to do so personally. My fiancee is starting a business, and has a business credit card. The limit is low, far lower than any of my debts, and they only use it to purchase supplies for jobs before they get paid. Business credit cards are just like personal credit cards, they need to be used responsibly.

  4. I agree with the previous comments concerning responsability.  Only get business cards if your personal cards are under control. Otherwise you will just be getting in deeper.

  5. Shawanda says:

    You’re not selling me on business cards. (Not that that’s your objective.) I’m trying to figure out what would be the purpose of having one. Why not just use a personal credit card if you’re going to be liable for it anyway?

    • Carrie Smith says:

      That’s what I’m doing Shawanda, using my personal card – which is tied to a separate account – to pay for business expenses. To me it’s easier and has the same benefits.

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