instead of for your business. (They earn their percentage in either case.)
In the past, the decision between using a small business card and a personal one was pretty easy. But it’s become more complicated thanks to the Credit CARD Act. That legislation, which was passed in 2009, gave consumers significant protections when it comes to their credit cards. It stopped the practices for example of raising interest rates on outstanding credit card balances at any time for any reason, and restricted penalty fees, among other things.
This law, however, specifically excludes business credit cards. So that means that a card issuer can still raise interest rates on business or corporate credit cards at any time, or set cutoff times for a payment to be received in the middle of the day, instead of by 5 PM as required by the CARD Act, for example. And those are just a couple of examples of the protections that don’t automatically come with business credit cards.
Fortunately, some card issuers have extended some of the protections the CARD Act offers to their small business cards. If this is important to you, then look for a card that offers these protections.
Summary of Protections Under the Credit CARD Act
Here are some of the consumer protections offered under the federal CARD Act. Again, these apply to personal—not small business—credit cards, though, as mentioned, some issuers include these on their business cards.
Before changing your interest rate, increasing fees, or making other significant changes to the terms of your credit card, your card issuer must send you 45 days advance written notice. You then have the option to “opt out” of the change in terms and pay back the balance at the previous terms. (You may have to close your account.)
Your issuer can’t raise your rate the first year unless you are 60 days late with a payment, your card has a variable rate tied to an index that changes, or an introductory rate expires.
No “floating” due dates are allowed. Your due date must be the same date each month and the cut-off time for receiving payments can’t be earlier than 5 pm. If your due date falls on a weekend or holiday when your issuer doesn’t accept payments, you can make your payment the following business day without penalty.
If you pay more than the minimum payment due, your card issuer must apply the amount over the minimum toward the portion of the balance with the highest interest rate, not the lowest rate as they did before this law went into place.
Late fees are capped at a “reasonable amount” (generally $25) and card issuers can’t charge an over-limit fee unless the consumer has “opted in” to allow their card to go over the limit.
If small business or corporate cards don’t offer those protections, then why would you, as a business owner, even consider one? One good reason is to help protect your personal credit. Balances on your personal cards almost always show up on your credit reports, but balances on business cards aren’t typically reported to the personal credit reporting agencies. If your business relies heavily on credit cards for financing, it’s helpful to keep that information off your personal credit reports so that your credit scores don’t drop due to the maxxed out credit card. A warning: Do not assume that if one of these accounts does not currently appear on your credit reports that it will never show up there. Almost all small business cards will require a personal guarantee and will report payment history to the guarantor’s personal credit if the account goes into default. Out of the top ten issuers of these cards, only one does not report any payment information to the owner’s personal credit reports.
In addition, around the time the Credit CARD Act became law, one of the major issuers of small business cards decided to start reporting all of the activity of their small business cards on the owners’ personal credit reports. Some business owners saw their credit scores plummet due to the debt they were carrying on one of these cards. Because their credit scores dropped, they were having a hard time getting a different card to use to transfer the balance. It was truly a Catch-22.
Can one of these cards help you build business credit? It depends. Most of them do report payment history to at least one of the major corporate credit reporting agencies. However, unlike personal credit cards which almost always show up on all three of your major credit reports (at Equifax, Experian, and TransUnion), these cards may not report to all of the major agencies we will describe later.
If you are confident in your ability to manage one of these accounts successfully, then hold on to those offers you receive and spend a little time comparing them. You can also get more information on credit card offers in our Resource Section. You can also use a website like Credit.com which compares offers for you. Just don’t apply for multiple cards at once. Each issuer will almost always run a credit check on your personal credit, and that will appear on your credit report as an inquiry. Recent inquiries can lower your credit score slightly, so only apply for one card at a time and make sure it’s one you really want.
As long as you have decent personal credit scores, it’s usually not that hard to get one of these cards, even if your business is relatively new. You may have to settle for a smaller credit line or you may have to get a charge card that requires you to pay your balances in full each month, but most people will be able to qualify for one. When you do, you may find yourself in a good position to earn lucrative rewards for your business spending. Those may include airline miles or points toward travel or merchandise. The rewards on business cards are similar to those for premium personal credit cards. And as long as you pay in full each month to avoid interest, one of these cards can be an excellent deal.
• Retail and gas cards are the easiest for businesses to get without a personal guarantee.
• Major business credit cards (American Express, Discover, MasterCard, Visa) are more widely accepted, but usually require personal guarantees unless your business is well-established.
• Again, do not fill out multiple card applications at once. Doing so can create multiple inquiries on your credit file, and a result in denial.
• After you have had a business card for at least six months and have paid it on time, you may want to request a credit line increase.
We will explore the additional steps for building business credit in Chapter 13. For now, let’s get a business loan…
Chapter 3
Small Business Loans
Starting a business can be exhilarating; a leap of faith into the unknown, if you will. Those words also describe what Aaron and Kathy Corr’s customers often experience when they visit TreeUmph!, a fourteen-acre elevated obstacle course in the treetops for adults and kids ages 7 and older. At TreeUmph!, the adventure includes wobbly bridges, tightropes, hanging nets, swinging ropes and, of course, ziplines. It opened in January, 2013 in Bradenton, Florida and the response from the community has been enthusiastic.
But getting the business off the ground proved to be more difficult than the Corrs expected. Like many entrepreneurs, they tapped everything they could to get it started, including personal savings, personal loans, and funds from friends and family. “We’re fortunate to have a good strong team and good capitalization,” says Aaron. In fact, they thought they were good to go, but discovered that there were a lot of state, and municipal, and regulatory requirements that required additional funds.
So they went looking for a small business loan. “We were very confident we could find the money we needed because we knew we had a good idea, a good business plan, and we were well-capitalized,” Aaron says. “But we had a bit of a rude awakening when we started going to banks looking for the additional funding we needed. We literally were refused at the door at the banks that we went to
