Last week I was talking with someone that I consider both intelligent and business savvy. We got to talking about her small business, which, despite a tough economy, is doing well. After a while, I started asking her about her business expenses — and about the business credit cards that she uses to fund those expenses. She said that she doesn’t have any business credit cards. Instead, she funds many of her expenses with personal cards. Say what?!? Yeah, that’s what I was thinking, too. Given her background, and given her business acumen, I figured that others might be doing the same thing. Curious, I called another friend who runs a small law office. He said that he doesn’t have any business cards, either. The day-to-day expenses, he said, are purchased with personal cards. I was surprised. When I was thinking about starting my own small business last year, the first thing I did was look into a credit card that I could use exclusively for my business. I never thought about using a personal card for those purchases. Indeed, why would I want to run my business expenses through one (or several) of my personal credit cards? I wouldn’t. And neither should my friends.Here’s why it makes more sense to get a business credit card for your business. First, it’s always smart to keep your business expenses separate from your personal expenses. Don’t commingle the two. A business card — that’s only used for business expenses — makes it easy to segregate business expenses from personal expenses.Second, those business expenses (and the monthly balances) could be having a negative impact on your credit score if they’re being paid for with a personal credit card. Think about it. If you’re using a personal credit card with a $20,000 limit, and you’re running $15,000 a month in business expenses through the card, that’s a lot of utilization — utilization that’s being reported to your personal credit report. That kind of utilization is likely dragging your FICO score down. (Read about utilization and its impact here.) Worse, if you apply for a new personal credit card, while you have this kind of utilization on one of your personal cards, you could get denied. It won’t matter that the utilization problem stems from your business. Try explaining that to the underwriter that just denied you. The underwriter will see that your personal cards are being over utilized and conclude that you’re a credit risk. Still, you’re probably scratching your head trying to figure out how a business card would change your plight. After all, expenses are expenses. And credit cards are credit cards, right? Wrong. As it turns out, most business credit cards (and those huge balances) are not reported to your personal credit report. As a result, your scores won’t suffer because of your business expenses. Which means that you won’t have to worry about utilization ratios that have nothing to do with your personal life. It all seems so logical. And yet I have two small business owners telling me that they’ve always used personal credit cards to pay for things that are clearly business related. Go figure. Both of these people are now going to apply for business cards. But before doing so, here’s what they need to know. The credit card company will pull their personal credit reports to see if they’re creditworthy. The applicants will also have to agree to be personally liable for the debt that’s accumulated on the business card. In other words, the card applicant will agree to be the personal guarantor of the purchases. The legal significance is that the applicant wouldn’t be able to shift the expenses onto the business if the business went under. Instead, the applicant would be responsible for those expenses. Given that reality, it’s easy to see why the credit card company would pull the applicant’s personal credit report. The creditor simply wants to make sure that the personal guarantor isn’t a deadbeat. Assuming they’re not, they’d likely get approved for the card. After that, the only time that the personal credit report could come back into play is if the borrower defaults on the credit card obligation. Only then would the credit card company report the bad debt to the person’s credit report. Barring that scenario, the business card will never be reported to the small business owner’s personal credit report. (In the meantime, your business card could get reported to a business credit report that’s maintained by Experian or Equifax. This would be good news for your business. Many creditors (not credit card companies) pull your business credit reports when they’re deciding whether to extend credit to your business.)There are several business cards available. I’d stick with the major players. Bank of America (business cards here), Citibank (business cards here), American Express (business cards here), and Chase (business cards here) all have several business offerings. Also make sure that you get a true business card. Citibank, for example, peddles a card called the Citibank Professional card. It’s a hybrid card that serves both as a personal and business card. Unfortunately, it also gets reported to personal credit reports. If one of your goals is to keep your business expenses from harming your personal credit score, then stay away from the Citibank Professional card. Instead, check into one of Citibank’s true business-card offerings, such as the CitiBusiness card. The same goes for the Chase Quicken business card. It, too, reports to personal credit reports. Note that many of these business cards also offer some excellent balance transfer deals. If you’re not paying your business expenses in full each month (and they’re accruing interest on your personal cards), you should take advantage of these 0% offers. Chase, for example, has a card called the Chase Business Rebate Card (application here). It offers a 0% balance transfer deal that lasts 15 months. The only caveat is that your transferred balances must consist of business-related expenses. I assume your balances do. If you’re running a small business — and using personal credit cards to fund expenses — do yourself a favor and look into getting a business credit card. Not only will it be easier to track your business expenses (many business cards provide online tools that make it easy to manage expenses), but your credit score will appreciate the move as well.
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