Choosing a business credit card for your startup is a critical step. It will allow you to cover your costs, build business credit, and can offer powerful rewards in the form of cashback or rewards points. A business credit card becomes increasingly important if and when you decide to apply for venture debt or a business loan.
If you use your business credit card to make larger purchases, you can pay off your balance over time, often times without interest in the first year which can alleviate some of the financial stress of running a startup up front. In addition to affording the luxury of increased buying power, a business credit card will also allow you to separate and segment your business expenses from your personal expenses, an exercise that will provide for cleaner bookkeeping and a more streamlined process come tax season.
Here are the answers to some of the common questions we get from our clients looking to pick the best business credit card for their needs.
What criteria should I consider when choosing a credit card for my startup?
- How much do I intend to spend per year? Before choosing a credit card, it’s important to have a solid understanding of your business purchasing habits. How much are you spending monthly? Are there certain times of year when you are spending significantly more? What type of items or services do you purchase? All of these questions can impact your choice in a card, so it’s best to first gain a solid grasp of your spending before moving any further.
- Do I intend to carry a balance month-over-month? If so, what APR (annual percentage rate) am I comfortable with paying? Are you planning to pay off your credit card balance in full every month or will you need to carry a balance? This will determine what type of card you will need. With an American Express business card, for example, you are expected to pay off the balance in full whereas other cards allow for carrying a balance and have varying APRs. If you intend to carry a balance, it’s best to look for a card with a low APR as this is the interest you will be paying on what you carry.
- Am I willing to personally guarantee the cards? Most business credit cards require a personal guarantee. This means that if your business revenue fails to cover the charges, you are promising to pay off the funds. Similar to a personal credit card, the better your credit is, the more likely you are to receive better terms and better rewards. Before applying, make sure your credit is in good shape. There are some cards that don’t require a personal guarantee if you are looking to build credit or have a history of bad credit. Check out some of the popular credit card review sites to research which ones you would be eligible for given your personal credit and business credit history.
- What goods or services do I purchase most frequently and which rewards program would fit them? What are you spending the most amount of money on in your business? Try to find a business card that can provide you rewards in those categories. For example, if you spend a lot on airfare, it would make sense to look into a travel-focused card.
- Does the credit card have comprehensive fraud protection? Comprehensive fraud protection is incredibly important so that you can protect yourself and your business.
- Am I comfortable paying an annual fee? Many cards require you to pay an annual fee. If you are considering a card with an annual fee, be sure you know what the fee is upfront, if it increases or decreases annually, and then evaluate if the fee makes sense given the rewards and your business expenses.
- How many cards will I need? Do you plan to provide cards to your employees? How will this impact your credit card decision? Some credit card companies charge for additional cards whereas some do not.
Should I use a credit card from the bank I use for my business account?
The short answer is that it depends. The decision on whether or not to go with your bank credit card should be evaluated based on the criteria above. If your bank offers a credit card with a high APR and you plan to carry a balance, it might not make sense to go with their business credit card. Conversely, if they offer a low APR, then it could make sense.
Should interest rates or fees be the primary factor in picking a credit card or should rewards programs, etc. be factored into my decision?
Once again, it depends. If you are planning to carry a balance, the interest rate should be an extremely important consideration. The good news is, with the amount of business credit card options available, it doesn’t have to be an either or decision. If you plan to carry a balance, look for a card with a low enough APR that also offers relevant rewards for your business. If you aren’t planning to carry a balance, then the APR isn’t as important, and rewards should be considered more heavily. Some experts would say don’t pay an annual fee if possible, but it really depends on the card’s reward program. Often times, the cards with annual fees tend to have better rewards.
Should I consider a charge card instead of a credit card for my startup? What are the main differences?
In general, credit cards and charge cards function similarly. They offer similar rewards to one another, can have similar transaction fees, and similar annual fees depending on the card you select. Both cards impact your credit score as well. There are, however, two major differences. The first and most important distinction is that with a charge card you cannot roll your balance from month-to-month like you can with a credit card. This means that you must pay in full at the end of each month. You won’t have to worry about paying interest, but sometimes paying in full isn’t feasible, in which case a credit card should be considered instead. The second distinction is that with a charge card, you don’t have a predetermined limit. With a credit card, you have a spending limit in place. This limit may increase over time, but there is always a set limit in place. Charge cards don’t come with the same predetermined limit which allows for more flexibility.
Where can I compare credit card offers?
We’ve actually done a brief overview of some of our favorites and the business credit cards a lot of our startups prefer. We can also walk you through a consultation to identify what card would be best for your needs. There are a ton of business credit card comparison sites out there, but it’s important to note that the majority of these sites are getting kickbacks from the credit cards they feature. Examples are Nerd Wallet, Creditcards.com, and Wallethub.com
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