A business owner recently told me he had maxed out his personal credit cards to get his business off the ground, causing his personal credit scores to suffer. As a result, he’s had trouble getting traditional financing, but he doesn’t regret it. “You do what you have to do,” he says. However, things would have been a lot easier for him if he had understood the benefits of using a business credit card from the very beginning.
This person’s story isn’t uncommon. Unfortunately, many entrepreneurs don’t use business credit cards. Here are five myths that keep them from applying.
1. I Can’t Get a Business Credit Card for My Startup
Entrepreneurs can often qualify for business credit cards, even when their businesses are new, as long as they have adequate personal credit scores and meet the issuer’s income requirements. (Personal income from all sources may count; the income doesn’t have to come specifically from the business in most cases.) A business doesn’t have to be incorporated either. Those operating as sole proprietors (even part-time) may still qualify. In fact, there aren’t a lot of funding sources for startups, and as long as the owner has decent credit and sufficient income, a business credit card may prove to be one of the few that are available to get a business off the ground.
Don’t be discouraged if your credit scores aren’t perfect. There are business credit cards available for those with scores in the mid-to-high 600s. However, if you have really bad credit, getting a business credit card will be hard to get, and you may need to consider alternatives like trade credit while you work on building stronger credit. (Editor’s Note: American Express is a Nav partner, but this doesn’t result in preferential editorial treatment.)
2. They’re Too Expensive
Compared to bank loans, which may carry rates of less than 10%, credit cards may not seem like a cheap way to borrow. But when compared to other forms of flexible, fast financing—which is what they are—credit cards can be a bargain. Many other types of quick funding (ACH loans or merchant cash advances, for example) can carry effective interest rates of 25% to 75% or higher. By comparison, it’s not hard to find a business credit card with an interest rate below 18%.
3. My Personal Credit Card Is Just Fine
Using your personal credit card for your business purchases may seem like a simple enough solution, but sooner or later it may come back to haunt you. If you max out a personal credit card, your credit scores will suffer because the second most important factor that makes up your credit scores is your debt, and the ratio of your balances in comparison to your credit limits is a big part of that factor. If you find yourself relying on your personal credit cards for your business purchases, that heavy usage may bring down your credit scores and make it more difficult to qualify for additional financing.
Most business credit cards, on the other hand, don’t report account activity to the owner’s personal credit reports unless they default. If you use one of these business credit cards to make a large purchase, you don’t have to worry about it potentially hurting your personal credit scores.
4. They Won’t Help Me Build Credit
It’s true that most business cards aren’t reported to a business owner’s personal credit, but they often are reported to commercial credit agencies such as Dun & Bradstreet, Experian and/or the Small Business Financial Exchange, which means using one of these cards (and paying it on time each month) can help you build good business credit scores. In fact, this can be one of the easiest ways to start building business credit.
5. They’re Too Risky
A contractor recently told me he uses a business debit card because he’s worried a credit card will tempt him to run up debt. “It’s too risky,” he says. I told him that I believe the exact opposite: A business debit card is far more risky. If a credit card is used fraudulently, under federal law, the most the cardholder can be held liable for is $50 in authorized charges, and most card issuers will waive that. Business debit cards, on the other hand, are not covered by the same consumer protection law that protects consumers in the case of fraudulent debit card use.
I told the contractor he may want to consider a charge card, which would require him to pay in full each month, but would still provide protection in case of fraudulent use. Another alternative is a service called Debitize that transfers money to cover each purchase into a separate account, which is in turn used to pay off the credit card balance. It essentially allows you to use a credit card like a debit card.
Credit cards can be one of the safest and most flexible ways to pay for business purchases. And business credit cards in particular often offer higher credit limits and very lucrative rewards. So don’t overlook them—or let a myth stop you from making the right decision for your business.
This article was originally written on January 18, 2017 and updated on July 5, 2019.