Whether you are employed by a large firm or have your own practice, opening a separate credit card account for business expenses makes sense for multiple reasons. It can streamline recordkeeping, simplify tax preparation, and even result in cash back in your pocket.
What’s more, you don’t need a traditional business to open a small business credit card. These accounts are generally available to those who work as sole proprietors, including freelancers, consultants, and contract workers. That means if you own your own practice or ever pick up work on the side, you are likely eligible for a small business card.
Here are five reasons you should consider applying for one today.
1. Keep your personal and business expenses separate
The most basic reason to get a small business credit card is to keep your personal and business finances separate. Not only will this make tax time easier, but it also provides an accurate record of the actual expenses you incur while working. That information is crucial for setting rates and requesting reimbursements.
As a bonus, having a small business credit card means you don’t have to worry about your business spending affecting your personal credit score. Since business credit lines generally aren’t reflected on personal credit reports, they won’t be factored into your credit utilization ratio – something that is important if you have heavy business spending.
That said, remember that your personal credit generally serves as a guarantee for small business credit cards so spend wisely. If you owe money that your business can’t pay off, the card issuer can come after you personally.
2. Manage cash flow
Business income can be irregular and unpredictable. Plus, there may be times when clients don’t pay on time. If you are trying to cash flow all your expenses, you could find yourself short of funds or stretched thin at various times.
Having a small business credit card in the wings can help smooth out the hills and valleys in your income and cover any financial gaps between when your expenses occur and when your revenue comes in. As long as you pay the balance in full by the statement due date, you won’t pay interest charges.
Consider this example: Your work computer crashes on June 5, so you run out and spend $1,200 on a new one, charging it to your small business credit card. The billing period for that card closes on the June 25, but your due date isn’t until July 17. That’s nearly six weeks AFTER you purchased your computer. As long as you then pay off the full balance by that July 17 due date, you can think of this as having taken a six-week, interest-free loan.
If you need even more time to pay off your purchases, look for a card with an introductory 0% APR or an ongoing low interest rate. Another option is to get a rewards card so cash back or other perks offset the cost of your line of credit.
3. Earn rewards on everyday business purchases
Speaking of, don’t overlook the value of credit card rewards as a reason to open a small business credit card. Some cards offer welcome bonuses that can be worth as much as $500 cash back or $1,000 in travel rewards. That can make them worthwhile even if you don’t expect to use a credit card regularly.
However, many of the top small business credit cards today offer excellent rewards earning on everyday business purchases, which means you may not want to put the card away after earning the welcome bonus. For instance, cards may offer 5% cash back on office supply purchases or extra points for business travel spending. In fact, it might even benefit you to consider holding a couple of complementary cards and using them strategically to maximize rewards.
Earning those rewards can free up money in your budget to spend on other needs and grow your practice.
4. Access to business card tools and perks
Small business credit cards often come with additional “fine print” perks beyond the rewards they openly tout. Depending on the card, these could include the following:
- Extended warranty protection
- Auto rental collision damage insurance
- Cell phone protection
- Free checked bags
- Travel upgrades
If you have employees, you may be able to request cards for their use. Some cards also offer convenient mobile apps and online account management tools to review spending, add notes, and run reports.
Going back to our earlier example of the new computer purchase, if you used a credit card for the purchase that includes extended warranty protection, you can rest easy knowing that your computer’s manufacturer’s warranty will be automatically extended by a year or more just because you used your credit card to purchase it.
So, go ahead and say, “No, thank you,” when the electronics store offers to sell your an extended warranty plan.
5. Build business credit
As with personal credit, having a robust credit history for your business can provide access to better cards and secure more favorable lending terms. Opening a small business card and making timely payments is a key to ensuring you are able to leverage the credit you need as your cash needs grow.
Be aware that you’ll only build business credit if you have an employer identification number, known as an EIN. These numbers are issued by the IRS to businesses of all kinds, even sole proprietors. If you are a sole proprietor and use your Social Security number to apply for an account, having a small business card won’t create a separate business credit history.
Even if you don’t think you need a small business card, you probably could benefit from one. As you scale up your practice or consider taking on contract work, take a closer look at how a separate business card can make it easier to manage your finances while earning valuable rewards.