For small businesses, credit cards provide resources owners need when they don't have the cash. However, since small-business credit cards have been excluded from protection under the Credit Card Accountability Responsibility and Disclosure Act of 2009, better known as the Credit Card Act, small businesses must be careful and know the dangers this type of credit can pose. Business owners should know when and where business credit cards are best used and best avoided.
Personal Accountability
The Credit Card Act does not provide as many protections for business credit cards as it does personal cards. Because the business owner is still personally responsible for any debt incurred, it is more sensible to use a personal credit card for purposes such as funding or any expense that won't be paid back immediately. If a personal credit card is used for such expenses, the Credit Card Act will provide the protection necessary when the business is carrying a balance.
Higher Interest Rates
Business credit cards are usually charged higher interest rates compared to personal credit cards. Interest rates on business credit cards are also relatively high compared to loans and other types of finance. If a business allows interest to accrue, the cost of using the credit card will be high. High interest rates, late fees and high annual fees can make the business credit card an expensive option for financing costly purchases.
Risk of Employee Abuse
Any business credit card comes with the risk that employees might abuse the company card by charging personal items. If this happens, it could have dire consequences for the business because business credit cards have fewer protections than personal cards. To protect against this, employees should be authorized only to use cash, as it is easier to manage and oversee how and where employees are spending company money when they're spending cash.
Impacts Personal Credit History
A small-business owner is the sole proprietor and therefore has ultimate responsibility for the business's credit. Most business credit cards require a personal guarantee, which means the business owner must submit her Social Security number and previous credit history to qualify. If the business's credit card isn't used wisely, missed or late payments can harm the guarantor's personal credit history.