The Advantages and Disadvantages of Using Credit Cards for Business

According to the Pew Research Center, in 2022, approximately four-in-ten Americans (41%) said none of their purchases in a typical week were paid for using cash.

As our economy moves closer to becoming cashless, oftentimes a credit card is the only way to pay for goods – especially for online purchases. Few would argue that having a credit card is more convenient than having to ensure you always have enough cash on hand or carrying your business checkbook around.

But, as a best practice, you should always use a separate card for business purchases – don’t co-mingle personal and business charges.

Here are eight advantages of using a business credit card:

Easier to get a credit card than a business loan.

Using a credit card for business purchases is most often faster and less of a hassle than obtaining a small business loan. This holds especially true if you don’t have sufficient collateral often required by banks and other lenders to obtain a loan or a business line of credit.

They provide a financial cushion.

The simplest way to think of a credit card is as a type of short-term loan. Credit cards essentially provide you with a financial cushion that you can use to make purchases or take a cash advance.

Monthly statements are useful in business bookkeeping.

Credit cards provide a breakdown of your expenses by category, such as gas, dining, office supplies, etc., which can help facilitate your accounting and tax filing. These records will also prove useful in the event the IRS singles your business out for a tax audit.

Many offer rewards or cash back.

One simple way to generate extra cash for your business is by using a cashback credit card or one that earns you points toward rewards, such as for free travel or other travel discounts.

These credit cards pay you back a percentage of the money you spend on business-related expenses, such as office supplies, gas, business trip accommodations, vendor services, etc. And you can use cash back earned to cover other expenses, pay off your credit card balance, or bolster your savings. Considering how much money is allocated toward business expenses, cashback credit cards can add up to significant money over time.

Just be sure to read the fine print closely on credit card promotional offers.

They help build credit.

Establishing a solid payment history can help establish and improve your company’s credit score. This can give you access to lower interest rate loans, lower insurance rates and can improve your standing when it comes time to rent a property.

They allow you to set individual spending limits.

Giving your business credit card to employees is a big step but setting controls and safeguards on that card is crucial. It’s wise to choose a credit card that allows you to set a credit limit for each employee individually. This can help you stick to your budget and avoid issues with overspending or fraud. Again, as a best practice, be sure employees keep personal and business purchases separate.

They give you visibility to activity.

Activity alerts are a great way to monitor how much you and your employees are spending. Most cards make it possible to receive notifications when purchases are made – and many allow you to customize notifications – sending them for every purchase or only for those over a specified dollar amount.

They offer theft protection.

Under the Fair Credit Billing Act, your liability for unauthorized use of your card is limited to $50.

As a card holder, you have 60 days from the time you receive your bill to dispute a charge with the card issuer.

With that said, here are three disadvantages to keep in mind if you do opt for a business credit card.

Overuse of credit cards can impact your credit score.

When determining your credit score, credit companies consider the utilization ratios for each of your credit cards in their calculations.

In general, the lower your credit utilization ratio, the better your credit score. You should aim for a total utilization ratio, and ratios for each credit card of no more than 30%. Your credit score will take a hit if your utilization goes above that. And research shows that people with exceptional credit scores (800 or higher) tend to keep utilization under 10% for each card and for total credit card use.

Paying on time is important.

It’s important to try to pay off your balance in full every month. But if that’s not feasible, you’ll need to pay off at least the minimum amount.

Keep in mind that being 60 days late on making a credit card payment can trigger a penalty APR, which can be as high as 30%.

Should you get a credit card or a business loan?

There are significant differences between getting credit through a small business loan vs. a credit card.

A business credit card offers a revolving line of credit – as much as $50,000 – often at a much higher interest rate than a bank loan.

Credit cards are typically used for ongoing or recurring business expenses and emergency situations.

With a small business loan, you can apply for a lump sum of cash upfront (up to $5 million) and repay it at a fixed interest rate – typically much lower than credit card interest rates. Such loans are typically used for business expansion, debt refinancing and large purchases.

For large purchases, if you have good credit, solid business finances, and some business collateral, it’s often best to apply for a loan.

We can help you understand your cash flow.

Sometimes, with everything you’re trying to manage, understanding your cash flow can be challenging, but our accounting professionals are here help.

Contact us to discuss your business goals and explore whether our services are right for your small business.