Credit Cards and Your Small Business

Whether your business has been up and running for years or you’re just thinking about setting up a shop of your own, figuring out what credit cards to have – and using them wisely – are crucial for your long-term success.

This is a good time to be shopping for business credit cards. Credit card issuers are devoting a lot of attention to small business owners these days and are coming out with very tempting offerings – especially for folks with very good to excellent credit. How would you like an introductory rate of 0% for a year on new purchases and balance transfers? If you have an excellent credit score, it could be yours!

But Don’t Apply Just Yet
Due to the ongoing credit crunch which has been brought on by all the subprime mortgage defaults, card issuers are getting pickier about who they allow to use the business cards that have the best deals. Knowing how they make their decisions and taking a few steps before you apply will increase your odds significantly.

In brief, card issuers look at both your personal credit picture as well as your business’ history before they decide whether to give you a business credit card. If they’re not thrilled with what they see, they may not give you a card at all, or they may give you one that has less generous terms than the ones you saw advertised.

How Do Lenders See You?
Have you been depending on your personal credit cards for working capital? You will find it a lot easier to get a business credit card than a loan from your bank or credit union, but before you start counting on getting some plastic for your biz, your personal credit picture needs some attention.

Using your personal plastic for your business can be problematic for a bunch of reasons. Of course, there’s the danger of becoming over-extended. But even if things are humming along quite nicely, if you’re charging a lot compared to your available credit, your credit score will take a hit. That in turn will make it harder for you to get a home mortgage, car loan… or a business credit card. The sooner you can separate your business from your personal expenses, the better.

Pay down as much of the credit card debt? as you can and don’t apply for any other credit, at least not until you finish reading this article (hehe), so you don’t have inquiries showing up that may lower your score. Then check your credit reports and credit score. This is not the time to have an error hold you back! Correct any mistakes that you find ASAP.

Card issuers require your personal guarantee before they will approve a business card. The better you look on paper, the more generous their terms are.

How Do Lenders See Your Business?

If you haven’t gotten very far in establishing your business, you may think that lenders can’t see anything at all about your enterprise. That may or may not be the case! Businesses have credit reports just like people do. Information about them is gathered by mega-agencies from multiple sources.

Then lenders develop and use their own business credit scoring systems to help them assess risk. To decide how much credit you’ll receive, a lender will weigh your firm’s credit history and track record, the type of business you are in, and your personal credit score. So the care and feeding of your business’s credit picture should be a top priority. Otherwise, you’ll pay the price. It’s quite similar to what goes on with personal credit scoring.

Agencies such as Dun & Bradstreet, InfoUSA, and Experian collect all sorts of information to build a business’s credit profile. The level of detail they collect and the number of businesses they collect it on is quite staggering. For example, on the 100 million+ businesses Dun & Bradstreet tracks around the world, it makes “over 1.5M updates to our database on a daily basis. It could be major transactions like paying vendors or making lease or mortgage payments, but it could also be seemingly smaller transactions like equipment leasing, advertising, shipping packages or underwriting insurance.”

InfoUSA makes over 17 million phone calls to update “all 15.5 million business records every year using telephone directories, annual reports, press releases, SEC records, Chamber of Commerce directories, and thousands of other sources.“

Experian’s 18 million business credit reports “combine information from sources including actual trade payment experiences submitted by payees, public record information, collections information, company background and comparative data placing a company’s payment performance in context with its industries … state filing offices, public records, credit card companies, … Standard & Poors and marketing databases.”

For the Business Credit Bureaus to See Your Firm in the Best Light
It’s going to take time to build up a stellar business credit score. The sooner you take the following seven steps, the better:

• Double-check on your personal credit history, as we discussed earlier.
• Obtain whatever licenses are required in your state and locality for the type of business you own.
• Get a phone number that is listed in your business’s name. Make sure it is available through directory assistance.
• Choose a corporate structure that will help build up your business credit rating. Credit.com’s credit and personal finance expert, Gerri Detweiler, recommends a visit to Corporate Direct, where you can get a FREE 15-minute consultation with someone experienced in incorporating small businesses.
• Wherever possible, do businesses with firms that report to the major business bureaus. Over time, your goal will be a mix of credit references, including at least one business credit card that reports. Not all vendors report to all three credit bureaus, so make sure to ask before you apply! Gas and office supply cards can also be helpful.
• Make certain that your business looks as reputable and stable as possible in all advertising.
• Once you’ve taken the first six steps, it’s time to visit Dun & Bradstreet to get a D-U-N-S Number. That’s short for a “Data Universal Numbering System Number,” which will identify your business and its credit record in Dun & Bradstreet’s huge database.

Now It’s Time to Go Shopping

Credit.com makes it easy to look over the current crop of small business credit cards. As you browse through them, consider how you will use your business credit card(s). Ask yourself these questions:

• Will you be paying off the balance every month? If so, consider the pros and cons of the various reward and rebate cards you might want for your firm. If there’s a good bit of travel involved, a card that is generous with frequent flier miles might make sense, especially if it has no blackout dates. Or you might prefer a card that offers 5% cash back, a large credit line, extra earnings on certain purchases – for example, fuel, office supplies, car or truck parts – or some combination. Some card issuers offer as many cards as you have employees, while others will imprint your businesses name on the cards … whatever they can think of to tempt you!
• Will you carry or transfer a balance? Ignore the rewards and look at the interest rate. It’s hard to imagine more generous intro rates than the ones being offered on small business credit cards these days. Just as you would with a personal card, watch out for the rate changes, and don’t agree to a card until you understand what the fees will be, if any, should you transfer debt to that new card. Although all those rewards are attractive, remember that there’s no benefit to paying more in interest than you’re getting back in rewards. You want to pay the lowest interest rate possible, no matter how appealing the rewards may be on other cards.
• Will you be doing both? Many small business owners have routine, monthly operating expenses, as well as longer-term debt and cash flow issues. They manage their debts by having one or more rewards cards for expenses they will regularly pay off and a low-rate card for their longer-term debts. As long as you can trust yourself to use the right card for each expenditure, that should be fine. However, don’t forget that you are personally liable for all your business charges!

Last Minute Reminders: Be sure to read the fine print before you apply so you’ll know what you’re getting into and when the introductory rates will rise. Make sure that the card reports to the credit bureaus so it can further build up your business credit history – and don’t take on more debt than you can handle!

* Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com and Credit.com.