As a business owner, several credit card companies may have approached you for a business credit card. A business credit card works a lot like you personal credit card. It is an additional source of business funds and is a convenient way to record your business expenses. However, you must also understand the hidden catches of using a business credit card.
Hidden catches of using business credit cards
1. You are personally responsible for the debt on your business credit card –
Even though you use the business credit card for expenses associated with your business, you are personally liable to clear the dues. This also means that failure to clear your business expenses on time will influence your personal credit ratings.
2. Higher rates of interest compared to other sources of business credit
Interest rates on business credit cards are higher than business loans and lines of credit. In addition, some credit card companies charge a higher rate of interest on business credit cards compared to personal credit cards.
3. The rates of interest can vary
Unlike a loan or fixed line of credit, the credit card company may increase the interest rate on your business credit card depending on your repayment pattern. If you default on payment or exceed your credit limit, you risk being levied a higher rate of interest. Therefore, you do not really know your final cost of borrowing.
4. High fees
The business card annual fee and associated charges such as late fee and over limit fee means that you could be spending another $200 to $300 dollars in fees alone. Therefore, you may want to consider using your personal credit card (for which you already pay an annual fee) for meeting unplanned business expenses.
5. Risk of employee abuse
A business credit card is advantageous when you want to allot individual spending limits to employees. However, there is always a chance that they might use the card for personal spending, for which the business ends up paying. Therefore, you need to monitor spending on business cards issued to employees.
6. Risk of overspending
Business credit cards also often offer higher credit lines than personal credit cards. This puts you at risk of overspending on the business credit card, without having the business cash flow to repay the balance. As a rule, use the business credit card for only as much as you can pay in full.
Despite these hidden catches in using business cards, there are benefits that you must consider. Some business credit cards offer special benefits for business owners such as discounts on travel and detailed spending records to make reconciling of accounts easier. A business credit card can help establish a credit history for your business and make it easier to borrow from other sources.