Business Banking. Business Credit Cards
Business credit cards are charge cards issued against a revolving line of credit to which the business is the borrower. They are made to facilitate purchase of goods by giving the card owner longer payment terms and rewards for brand loyalty. The cardholder is assigned with a revolving credit limit. Any time the card is used the limit is reduced by the amount of the purchase. At the end of the billing cycle, typically every 28 days, a statement is issued showing:
Statement Balance: money spent during the previous billing cycle + any unpaid balance from previous statements. If the full statement balance is paid by the due date on the statement no interest or fees are charged.
Payment due date: typically, 25 days after the statement issue date. Any payment made after the payment due date will count towards the next billing cycle. Those 25 days are called a grace period when borrowers can avoid interest charges.
Minimum Payment: this is the minimum amount the cardholder must pay before the due date to keep the card open. Failing to make the payment may result in late payment fees in addition to interest. If the cardholder misses 2 minimum payments the bank is allowed to close the credit card account and collect the full amount owed.
To approve a business credit card application, the bank will consider the following:
The revenue and net profit of the business
The total assets and working capital of the business, in particular assets held in the approving bank.
The credit score of the business
The credit score and individual income of the guarantor: the guarantor is an individual that typically owns 25% or more of the company and takes personal responsibility if the business defaults on the debt. Most banks require this even if the business is an LLC or a Corporation.
Businesses that are not approved are encouraged to consider secured credit cards. Secured credit cards work exactly the same as regular credit cards, but they are issued against a deposit held in a non-liquid account. For example, the company deposits $1,000 as a security deposit, the bank holds it in a CD or general ledger account and issues a card with $1,000 limit. This allows companies to earn rewards on purchases and build their credit. Once they have built enough credit they can apply for graduation, which returns the security deposit while keeping the credit cards. Simply put it turns the secured credit card into unsecured. If the graduation is not approved, the business may still get their deposit back by closing the card. Any unpaid balances will be deducted from the security deposit.
One of the biggest advantages of credit cards over debit cards is the rewards they offer. This is typically expressed as a percentage of the purchase price. Since the rewards are considered a discount on a transaction they normally, are not taxable. Depending on a credit card the rewards can be in form of cash that can be directly deposited into a checking a checking account or in form of points that can be used towards specific products. From rewards perspective there are 4 types of credit cards:
Cash rewards - they offer cash, normally, from 1%-3% on every transaction. Rewards may differ based on a merchant category. For example, the credit card may offer 3% on gas and 2% on restaurant meals.
Travel rewards - they offer higher rewards on travel in form of points that can later be redeemed for travel related purchases such as hotel reservations or car rentals. Often, they waive foreign transaction fees. It is also typical to offer extra travel perks such as travel insurance, collision waiver on car rentals or daily meal allowance.
Airline rewards - similar to travel rewards they offer rewards in form of miles that can be later used to purchase airline tickets and other related things. Extra perks, such as priority boarding, VIP lounge access or meal allowance on board are also typical.
Brand specific rewards - They are sponsored or co-sponsored by large companies to promote loyalty to their brand by offering higher rewards and better payment terms. Brands like Apple, Hilton, Macys and others offer generous rewards for shopping with them. These cards can either be issued by a bank or by the store itself. If issued by a bank, it will typically have Visa, Mastercard, Discover or American Express logo and can be used anywhere these card brands are accepted. If issued by the brand, they, normally, can only be used to purchase their products and services.
Ideally, a business will have one card from categories 1 2 and 3 and few brand rewards cards for the brands they shop the most.
Credit card market is very competitive, and banks are ready to go an extra mile to attract customers. When choosing the card the business can look at:
Welcome bonus.
Rewards
Annual Fees
Interest free payment terms
To keep an optimal credit score it is advisable to keep credit card balances under 30% and not apply for more than 2 credit card a year. Credit cards should be used for everyday purchases to build credit, earn rewards and extend payment terms. They should not be used as a source of cash or for long-term borrowing due to high interest rates.