Business credit cards reviewed

Business credit cards are rarely thought of as finance, yet for many small businesses they are the first credit facility they ever hold. Reviewed as a borrowing tool rather than a rewards product, the picture is simple: brilliant for paying, poor for borrowing. Knowing which way you are using yours is most of the battle.

How business cards work as credit

A card gives you a revolving limit. Each month you receive a statement. If you pay the closing balance in full by the due date, most cards charge no interest on purchases, which gives you a period of free credit between buying and paying. If you pay less, interest is charged on the unpaid balance, often back to the date of each purchase, and continues until the balance is cleared. Cash withdrawals are usually treated differently, with fees and interest from day one.

Business cards also come with features that have nothing to do with borrowing: separate cards for staff with individual limits, expense categorisation, integration with accounting software and, sometimes, points programs.

Paying tool or borrowing tool?

Used as a paying tool	Used as a borrowing tool
Balance cleared every statement	Balance carried month to month
Effectively no interest cost	Interest accrues on the carried balance
Helps track and control spending	Can hide a cash shortfall
Small, regular expenses	Stock, equipment or wages

If your card balance has been growing for three or more statements, it has quietly become a loan, and probably not a cheap one. Moving that balance to a business line of credit or a structured working capital loan can lower the cost and give you a repayment plan.

Liability: the clause owners skip

Many business cards make the cardholder, or the director who applies, personally liable for the debt, even when the account carries the company’s name. Some make the business and the individual jointly liable. That matters if the business ever struggles: the card debt can follow you personally. Read the liability section before you apply, and before you issue cards to staff. Our guide to business credit scores explains how card accounts can appear on your personal credit file.

Fees to compare

• annual or per-card fees;
• interest on carried balances and cash advances;
• cash advance fees;
• foreign transaction fees on overseas or international online purchases;
• late payment and over-limit fees.

A card with a higher annual fee but lower transaction fees can work out cheaper for a business that spends a lot overseas, and the reverse is true for one that does not.

Using a card alongside other finance

Many well-run businesses use a card for day-to-day expenses, a line of credit or overdraft for cash flow dips, and term finance for larger purchases. Each tool does one job. Problems arise when one tool tries to do all three.

An illustrative example

A made-up design studio puts software subscriptions, travel and small equipment on a business card each month and clears the balance in full on the due date. The card effectively gives the studio several weeks of free credit, makes expense tracking easy and costs only its annual fee.

Then a large client pays late, and the studio pays two months of contractor invoices on the card. The balance is not cleared and interest starts accruing. Three months later the balance is still there. At that point the card has become an unplanned working capital loan. Moving the balance to a line of credit or a short-term facility with a clear repayment plan would likely cost less, and would leave the card free for its proper job.

Questions to ask before applying

1. Who is liable: the business, the cardholder or both?
2. What is the annual fee per card, and for additional staff cards?
3. How long is the interest-free period, and does it apply only when the previous balance was paid in full?
4. What are the cash advance, foreign transaction and late payment fees?
5. Can individual limits and spending controls be set for staff cards?

When a card is not enough

If you are reaching for the card to cover wages, stock or a tax bill, it is a sign the business needs a proper facility. To explore what might fit, make one enquiry. There is no credit check when you first enquire, a real person reads it and your details go to one lending partner rather than a list. Tell us how much is on your cards and what it was used for; it helps to size a sensible alternative. You can also ask about consolidating card debt into a single facility.