Business Credit Card

A business credit card is a credit card issued in connection with a business and intended for business expenses. Mechanically it works like a consumer credit card, a revolving line of credit with a limit, a statement, and interest on carried balances, but it sits under a different set of rules and usually carries a personal guarantee from the owner. Those two differences, weaker consumer-law protection and personal liability, are what a small business owner most needs to understand before treating a business card like the personal card it resembles.

The first difference is the personal guarantee. Most small-business credit cards require the owner to personally guarantee the account when applying, which means that if the business cannot pay, the issuer can pursue the owner's personal assets for the balance. So even though the card is for the business and can help keep business spending separate, the debt is not truly walled off from the owner the way an LLC or corporation might otherwise wall off business obligations. A personal guarantee cuts through that separation for this particular debt.

The second difference is legal protection. The Credit CARD Act of 2009, which added protections such as limits on retroactive rate increases, restrictions on certain fees, and rules on payment timing, was written for consumer credit cards. Business and commercial cards are largely outside its scope, so many of those protections do not fully apply. Some issuers voluntarily extend a few consumer-style protections to their business cards, but a cardholder cannot assume the consumer rules are in force. In practice this means a business card's terms can shift with fewer constraints than a personal card's, which is a reason to read the agreement rather than assume familiar protections.

The third difference is credit reporting, and it is easy to get wrong. Some issuers report business-card activity only to business credit bureaus, some report to the owner's personal credit, and some report to both, and the policy varies by issuer. Because most cards carry a personal guarantee, a serious default can reach the owner's personal credit even where routine activity does not, since the guarantee makes the owner liable. Building business credit is one reason owners open these cards, but whether a given card actually helps or hurts personal credit depends on that issuer's reporting policy.

Imagine an owner of a small LLC opens a business credit card, using a hypothetical scenario. On the application she provides the business's details and her own, and she signs a personal guarantee. She uses the card for business costs, inventory, advertising, a laptop, and pays the statement in full most months.

Two things follow from the structure. First, if the business hit a bad stretch and could not pay a $6,000 balance, the issuer could look to her personally for it, because of the guarantee, notwithstanding the LLC. Second, because her issuer reports account activity to business credit bureaus rather than to her personal file, her on-time payments help build the business's credit profile, though a default serious enough to trigger the guarantee could still land on her personal credit. Whether any of this helps or hurts her personal score therefore turns on the issuer's specific reporting policy, which she confirmed before applying.

Pros

• Keeps business spending separate from personal spending, which simplifies bookkeeping and taxes.
• Can build a business credit profile when the issuer reports to business bureaus.
• Often comes with higher limits and business-oriented rewards or expense tools.

Cons

• Usually requires a personal guarantee, so the owner is personally liable for the debt.
• Many CARD Act consumer protections do not fully apply, so terms can change with fewer restrictions.
• Reporting policies vary, so a card may or may not help personal credit, and a default can still reach it through the guarantee.
• Carrying a balance is expensive, and business-card interest is not something the CARD Act's consumer limits necessarily constrain.