Hurray, you’ve launched your new startup! Whether it’s a pop-up shop, a digital venture, or an enterprise seedling, figuring out your financial approach will often be your toughest solve.
How do you fund your big expenses without any income? Do you take out loans, save up money from your regular job, or get multiple business credit cards for startups?
Amongst all types of credit cards, business credit cards are tailored for business needs and can make transactions convenient when you don’t have a profitable cash flow. But are business credit cards for startups and new businesses a good idea?
In this blog post, let’s talk about what business credit cards for startups are, whether you can get one and does your small business needs one. We’ll also tackle some important FAQs at the end of this post!
What is a business credit card?
Offered by banks and credit card networks, a business credit card is a powerful financial tool for anyone who owns or runs a business. These credit cards operate like personal credit cards but are meant exclusively for business-related expenses and transactions.
Hence, business owners should use these cards responsibly for their business needs such as buying office supplies, paying vendors, and business-related travels.
Whether you are a startup or a well-established enterprise, business credit cards make it easier to organize financial records, streamline expense tracking, and improve cash flow management.
The revolving line of credit provided by business credit cards can benefit both small and large businesses. Small businesses and startups can use it to bridge cash flow gaps or make essential purchases, while larger enterprises can optimize their working capital by strategically using the card to manage expenses.
Benefits of business credit cards
One of the main things startup founders wonder about startup credit cards is this: Is it good to have a business credit card?
Let’s answer that with the top 3 pros of having a business credit card for startups!
Separates personal and business finances
One of the most significant advantages of business credit cards is their ability to separate personal and business finances. By using a dedicated business credit card for company expenses, you create a clear distinction between personal and professional spending.
This separation simplifies accounting and financial record-keeping, reducing the time and effort required to track and categorize expenses. It also helps ensure compliance with tax regulations, making it easier to file accurate tax returns and claim deductions.
Improves cash flow management
Poor cash flow and liquidity are the biggest killers of startups across America. But with a business credit card for new business, you don’t have to worry about having no money at the start.
Startup business credit cards offer a revolving line of credit that can be used to cover operational expenses, bridge short-term cash flow gaps, or seize opportunities that need immediate capital.
This financial flexibility can be a lifeline during lean periods, allowing you to continue business operations without relying solely on cash reserves. It ensures that you can pay bills, purchase inventory, and meet other financial obligations even when revenue is uneven.
Offers rewards and perks
Many business credit cards come with rewards and perks tailored to the needs of businesses. These rewards can include cashback, travel miles, discounts on business-related expenses, or even special promotions with partner vendors.
If you manage to properly use your startup business cards for every business transaction, you can earn many points, perks, rewards, and bonuses! In turn, that can help reduce your overall business expenses or fund growth initiatives.
Talk about a financially savvy choice for startups and small businesses!
Drawbacks of business credit cards
Business credit cards for startups might sound like a dream come true so far. But like any financial opportunity, it has a catch. Here are 3 cons of business credit cards for new businesses and startups:
High-interest rates
Business credit cards typically carry higher interest rates compared to other forms of financing like loans or lines of credit. This means that if you carry a balance on your card, you’ll accrue interest charges at a relatively expensive rate.
For startups and small businesses with limited cash flow, these interest expenses can become burdensome, eating into profits and potentially causing financial strain.
Credit risk
Startups often lack an extensive credit history, making them riskier in the eyes of lenders. This credit risk can result in several challenges. First of all, it’s often more challenging for startups to qualify for business credit cards.
But even if they are approved, they might face higher interest rates or lower credit limits. These limitations can hinder your business’s ability to access funds when needed and can lead to increased borrowing costs.
Personal liability
Many business credit card issuers require a personal guarantee from the business owner. This means that if the business is unable to repay the card debt, the owner is personally responsible for it.
This personal liability can put the owner’s personal assets, such as their home or savings, at risk. It’s a significant drawback, especially if the business encounters financial difficulties or struggles to manage its card debt. Therefore, careful consideration is needed before taking on this potential risk.
Should I open a business credit card?
The answer to this question lies in the fine print details. Opening business credit cards for startups or new businesses means you can sensibly gauge your need for one.
That said, it’s also not quite obvious to figure out if you should open a business credit card for your business! These 5 questions can help you figure out if you should open a business credit like
Do you have a good personal credit history?
Startups and new businesses don’t come with a credit history that business credit bureaus can judge. So if you’re looking for a business credit card, start looking into whether you have a good credit score and history personally.
If you have an exceptional credit history, it’s a good idea to apply for and responsibly use a startup business credit card. It’s also the main factor that will decide if the assessors will grant you the business credit card!
Are you qualified for a business credit card?
Business credit cards are available to sole proprietors, freelancers, and partnerships, even if the business isn’t registered or incorporated. They are also available to corporations, large business owners, and everything in between!
For you to apply for a business credit card for startups, you’ll need to make sure you have a business, even if it’s unregistered.
Does your business benefit from credit reward systems?
Business credit cards, like personal ones, offer rewards such as cashback, travel rewards, and welcome bonuses. They can provide short-term financing for business needs.
However, it’s essential to consider the types of rewards offered, as not all purchases made with rewards may be tax-deductible as business expenses.
Does your startup need a higher credit limit than personal credit cards?
Business credit cards often have higher credit limits than personal cards due to businesses’ larger monthly expenses and incomes. So if you’re aiming to have a higher credit limit, you should look into opening a business credit card for your startup!
Keep in mind that issuers assess credit limits based on the applicant’s financial history and application. As long as you have a higher credit score and an impressive credit history, you should have no problem attaining a business credit card with high limits.
Do your employees need a business credit card for business expenses?
Many business cards allow primary cardholders to issue credit cards to employees. They can oversee business-related spending by setting limits and receiving alerts for card activity.
However, employee cards may carry joint and several liabilities, making both the employee and business owner equally responsible for the debt.
Frequently asked questions
Can a startup apply for a business credit card?
Yes, startups can apply for a business credit card. However, approval for business credit cards for new businesses and startups depends on your personal credit history, score, and income because the startup hasn’t established credit. As the business grows, it can build its own credit history and won’t need yours!
Do I need a business credit card for an LLC?
Startup business credit cards can be a valuable financial tool for an LLC, helping to separate business and personal expenses, track spending, and potentially build business credit.
Whether you need one depends on your business’s financial needs and preferences, but it’s a common choice for LLC owners to manage their finances efficiently.
What’s the point of business credit cards?
The primary purpose of business credit cards is to facilitate financial management for businesses. They help separate personal and business expenses, provide a convenient way to make purchases, offer expense tracking tools, and can come with rewards and benefits tailored to business needs.
They also assist in building a business credit profile and can provide a financial cushion for cash flow management.
Do business credit cards have interest?
Yes, business credit cards typically have an interest rate, also known as an APR (Annual Percentage Rate). If you carry a balance from month to month, you’ll be charged interest on the outstanding amount. So, it’s essential to pay off the balance in full each month to avoid interest charges.
Can you open a business credit card without a business?
Yes, it is possible to open a business credit card without having a traditional registered business entity. Many credit card issuers offer business credit cards to self-employed individuals, freelancers, or sole proprietors who operate under their own name, using their Social Security Number as a tax ID.
Final Thoughts
Startups often need extra funding to serve as a comfortable cushion in the initial stages. If you’re stumbling over cash flow problems for your new venture, business credit cards for startups and new businesses can be a great fit!
Business credit cards give you a higher limit and payback time, so you can easily finance larger payments while earning rewards for each transaction. But they’re also tagged with high-interest rates, credit risk, and personal liability, making other financing options a better option in some cases.
No matter what you’re looking for, just remember: business credit cards are just the beginning!
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