Just when small-business owners thought big banks didn’t want to deal with them, the banks are surprising them with zero-rate credit card promotions and enticing reward programs. Last month, I received 11 colorful offers from six different credit card issuers. It all seems too good to be true.
So, are these offers really a good deal for business owners? Unfortunately, not so much.
Small-business credit cards — or so-called “professional” credit cards — are exempt from the new regulatory protections of the Credit Card Accountability, Responsibility and Disclosure Act. This means that a credit card offered to Susan Schreter in the “name” of my company doesn’t have to abide by the regulations that now govern credit cards offered to me personally. And that’s how seemingly attractive credit card offers can turn out to be well-disguised gotchas! Here’s what you should bear in mind:
- Compare credit costs and risks. Unlike issuers of personal credit cards, business card issuers can impose retroactive rate increases “any time and for any reason,” including being late on another vendor’s bill. Issuers can also hit business owners with late fees associated with weekend payments or due dates that fall in the middle of the day. Unlike personal credit cards, business credit cards are not obligated to apply payments to outstanding balances with the highest interest rates.
- The IRS doesn’t care. A number of business credit card solicitations I’ve received imply that for IRS document-support purposes, it’s better to charge business expenses to a company-named small-business credit card than a personal credit card. Not so.
All the IRS cares about is the nature of the expense and proper recordkeeping. If you charge a personal expense to a business credit card, the IRS will still disallow the expense as a business deduction. On the other hand, owners can charge legitimate business expenses to a personal credit card that is set aside for business purposes and still qualify for an IRS business deduction.
- You’re always liable. Almost all the promotions I’ve received emphasize the ease of giving employees their own business cards. They say it helps staff members look “professional” and provides added convenience for tracking employee expenses.
But here’s what the promotions don’t highlight: The signer of the business card application personally accepts all responsibility for bill payment, even when employees make unauthorized purchases to a business card. This is true even if the business is organized as a corporation or limited liability company. Some cards will notify owners if employees exceed their spending limits, but that’s it. Once a charge is incurred, the business owner owns the liability.
The safest approach, especially for smaller companies that can’t afford costly surprises, is to promptly reimburse employees for documented business expenses. It’s funny how employees adhere to company-approved travel policies when expenditures first hit their own credit cards!
- Always know the score. Securing a business credit card can be advantageous to business owners who want to establish a credit history in their company’s name with Dun and Bradstreet, or “D&B.” If this is the primary purpose for taking on the added financial risks of a business credit card, make sure your issuer reports activity to D&B. Chase, for example, will forward information on credit cards to D&B. Others won’t.
Business credit card activity can also impact a business owner’s personal credit profile. Since business credit cards are personally guaranteed by the owner, it’s reasonable for business card issuers to forward account activity to personal credit scoring services. Again, some business cards do; others don’t.
- It’s not about the rewards. Most business credit card solicitations emphasize all the rewards associated with their cards — no blackout dates for travel, extra points or cash back on certain types of expenses, etc. But just because a promotion touts a great rate, it doesn’t mean you will ultimately qualify for the issuer’s lowest rate or the desired spending limit. When you read the fine print, you’ll also find that most cash-back offers are limited to a few expense categories or max out at a certain expenditure level.
Right now, Bank of America is extending some of the federally mandated personal credit card protections to its professional credit cards. I hope other credit card issuers follow Bank of America’s lead.
But until Congress votes to close banking loopholes that work against Main Street business owners, the prudent course of action is to be cautious and read the fine print. Favor predictable interest rate credit relationships that don’t just look good, but are also good for your company’s financial health.
Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship. She is the founder of TakeCommand, a community service organization that offers the largest centralized database of startup and small-business funding sources in the U.S.