Do you think it’s a good idea to use a business credit card?
Well, a survey revealed that more than half of businesses with less than 500 employees use credit cards regularly. That means it’s a common practice regardless of the size of the company.
The truth is, using a credit card for business transactions should not be likened to the way consumers use it to make purchases for their household. It’s very different. When consumers use their credit cards, they have all the freedom to choose how to use it. This is why it’s very easy to abuse it. If not careful, you can easily charge too much and end up with a lot of debts.
A business credit card is not used so recklessly. It is reserved for mostly official transactions – unless otherwise stipulated by the company. Some employees may be given a credit card as part of their benefits. But even so, that credit card is only used for its intended purpose. For instance, it could be used to pay for the gas consumption of a company car. Or it is used to pay for meals during business meetings. It can even be used to pay for travel expenses.
Regardless of the purpose, these cards do not leave room for unnecessary spending. It is also given a limit that should be strictly followed. The employee will not attempt to abuse that because it could mean disciplinary measures from the company.
Benefits of using a business credit card
What exactly can a business credit card do that contributes to the company?
Here are the common reasons why having a credit card for business purposes is very beneficial.
Improves business credit profile for future financing
Yes, just like the average consumer, businesses also have a credit profile. It can be very useful when it comes to future financing. And we all know that businesses use credit regularly. So you need to make sure that your credit profile has enough history to help boost the credit score of your business. Of course, that also means you have to make sure that you can properly manage the debt of the business. But that also means having enough credit to work with.
This is where a business credit card comes in handy. You can use it repeatedly – as long as you don’t reach the credit limit. If the company can meet the payment terms each month, you can use it to pay for transactions. This consistent use of credit will put more into the company’s credit profile. As long as the company maintains a good payment behavior, they can easily get financing in the future.
Helps monitor business spending
Another benefit of having a business credit card is to assist in monitoring company-related expenses. At the very least, you can easily check if the employees using the cards are really using it for it’s intended purpose. If employees use cash, it would be hard to determine if the money was really used for official transactions. With credit cards, you can look at the billing statement to specifically see the transaction history.
Apart from accountability, this will make things easier for whoever is managing the accounts of the company. The credit limit can also be used to make sure that there will be no overspending for anyone who uses the business credit card.
Provides financial cushion
There are times when the company experiences a negative cash flow. When this happens, you can use the credit card to help the company survive the crisis it is currently in.
Admittedly, this can be dangerous. But if the company is expecting a huge revenue or a collection in the near future, this reliance on credit cards will only be temporary. There is a risk – but as long as the person in charge knows what they are doing, the card can provide a financial cushion.
Of course, the best course of action is still to manage the cash flow so you don’t have to rely on a business credit card. But knowing that this is another one of the fallbacks that you can rely on, will make things less stressful.
Offers enticing rewards and incentives
Finally, these business credit cards also offer impressive rewards and incentives. From points to cash-back rewards, these cards can help the company save a lot of money. Companies usually have specific expenses that can add up to a huge opportunity to get rewards. Travel credit cards can be very beneficial for out-of-town business meetings. There are also cards that will give you phone-related perks if you use it to pay the phone bills of the company. Gas credit cards will also help the company earn a lot of points.
If the company chooses the right credit card, they can really take advantage of multiple freebies.
Possible pitfalls of using business credit cards
While having a business credit card is beneficial, there are also a lot of pitfalls that you need to be aware of.
According to reports, nonfinancial business debt soared during the first quarter of 2020. It is the greatest increase since 1952. In fact, it’s even greater than the debt borrowed by consumers.
If there’s a time to be careful with this credit card, it should be right now. You can start by getting to know what can make business credit cards dangerous.
The accruing interest of specific business credit cards is one of the main reasons why you need to be careful. If you cannot pay off your debt in full, a finance charge will be added to the balance that you will carry over. This charge is calculated based on your balance and the high-interest rate. That can grow your balance for the next month quickly. This can be an unnecessary business expense for the company – especially if you’re trying to cut back on expenses to stay afloat.
Not protected by the Credit Card Act of 2009
Another danger in using a business credit card is the fact that it’s not protected by the Credit Card Act of 2009. This only protects consumers from retroactive interest rate increases, sudden rate changes, etc. That means the credit card company can change your rate and billing date anytime they want. And you will only get a small time frame to act on it. This is why you need to be cautious of the balance that you will keep on your card. You might have to face a huge finance charge on the next billing statement. If possible, keep your balance zero or very low.