Business credit cards are a great solution for many of a small business’s purchasing needs. They eliminate the need to carry cash, make reporting easier at tax time and give you access to cash when you need it. But if you’re making one of three common mistakes with your business credit cards, you could be hurting your credit rating—and the future of your business.
Business Credit – Do’s and Don’ts
|Use your Business Credit to apply for business credit cards.||Don’t use your personal credit score to apply for business credit.|
|Use maximum 30% of your available business credit on any business credit card.||Don’t use more than 30% of your available credit on any given business credit card.|
|Use a business credit card or a business line of credit to cover business expenses.||Don’t use your personal credit cards to pay for business expenses.|
Ask yourself these three questions to find out if you’re making these all-too-common business credit card mistakes.
While this is common, especially among startups and one-person businesses, it’s a big mistake. When you put business purchases on a personal credit card, you can’t write them off on your business taxes. If your business begins to suffer and you can’t pay off the credit card, your personal credit rating takes the hit. Finally, even if you do manage this credit card wisely, it does nothing to help build your business credit score, since it’s a personal card.
In general, if you use more than 30 percent of your available credit on a business credit card, it will have a negative impact on your credit score. This makes it harder to get business financing, such as loans or lines of credit. If you do get financing, your interest rate is likely to be higher than it would if you weren’t over utilizing your available credit.
It may sound counter-intuitive, but you’re better off having (and using) several business credit cards. For instance, let’s say you have just one business credit card, with a credit limit of $20,000, and you have a balance of $7,000 on it. What would happen if your credit limit were suddenly lowered to $10,000? You’d suddenly be using almost all your available credit, and only have $3,000 left to cover ongoing expenses.
Instead, if you used multiple business credit cards and spread your expenses among them, it would help ensure you don’t use more than 30 percent of your available credit on any one card. It also gives you more flexibility. If you have four business credit cards with limits of $20,000 each, you’ve got $80,000 at your disposal altogether. (Of course, use those cards wisely.)
If you’re making any of the above mistakes, start correcting them now. If you are a new business owner, read our tips on budgeting for a business. Pay down excessive credit card debt to improve your credit score. Monitor your business credit score regularly to protect it. As your credit score improves, you’ll be able to request higher credit limits and open new business credit card accounts.
Contributed by Rieva Lesonsky
Rieva is a small-business contributor for Fundbox and CEO of GrowBiz Media, a media company focusing on small business and entrepreneurship. She has spent 30+ years covering, consulting, and speaking to small businesses owners and entrepreneurs.