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.

Summary:

Business credit cards offer convenience, flexibility, and financial tracking benefits but can also create risks if misused. Used wisely, they simplify bookkeeping, provide rewards, build credit, and offer fraud protection- yet overuse or late payments can harm credit scores and increase costs.

FAQs:

What are the main advantages of using a credit card for business purchases?

Using a credit card for business purchases is often faster and less of a hassle than obtaining a small business loan. In fact, you can think of credit cards as a type of short-term loan. The breakdown of expenses that credit card companies provide can help simplify your business tax filing. Many cards allow business owners to set individual spending limits and they sometimes offer rewards or cash back for purchases made. Credit cards also offer theft protection and provide visibility to purchases your employees are making.

What are the potential downsides of using business credit cards?

There can be some disadvantages to having a business credit card. For example, overusing credit cards can impact your credit score and if you’re 60 days late making a credit card payment you may incur a penalty annual percentage rate as high as 30%. Be aware that small business cards often require a personal guarantee, meaning you are still personally responsible for the debt incurred.

How can a business credit card help build or improve credit history?

A business credit card can help build credit by providing a separate record of on-time payments to business credit bureaus. A strong business credit history can help your business qualify for larger loans, better financing terms, and favorable contracts. It can also indirectly improve personal credit by lowering your personal credit utilization ratio. To maximize credit terms, keep balances low on the business card, ideally below 10% of the credit limit. 

What’s the difference between using a business credit card and taking out a business loan?

The main differences between using a business credit card and taking out a business loan are in amount, interest rates, and repayment terms. A business loan is issued for a large, lump-sum amount with fixed, lower-interest payments over a longer term, while a credit card is for smaller, ongoing expenses with a flexible, revolving line of credit with higher interest rates. Business loans typically have a more difficult qualification process but are often cheaper for major purchases, while credit cards are easier to get and better for short-term needs, especially if you can pay the balance in full each month to avoid interest. 

How can business owners manage credit card spending responsibly to protect their credit score?

Use a dedicated business credit card exclusively for business expenses. This practice simplifies bookkeeping, makes tax preparation easier, and helps preserve the integrity of both your personal and business credit profiles. Publish a written policy that outlines approved expenses, spending limits, and the consequences for violations. This ensures everyone understands the rules. Finally, connect your business credit card account to your accounting software to streamline expense categorization and reconciliation. This saves time and increases accuracy in financial reporting.