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Guide to business credit cards

Business credit cards work in a similar way to credit cards that most individuals carry in their wallet. However, as the name implies, these cards are only available to businesses, whether these take the form of a large limited company, a small start-up company, or a sole trader.

Businessman in London

Creating and managing cash flow effectively is an integral and incredibly important issue for businesses of all shapes and sizes, and a business credit card can help to facilitate that.

However, business credit cards are not only useful for freeing up capital and obtaining interest-free purchases (provided you pay off the balance at the end of the month). They can also prove to be an extremely useful financial tool which allows businesses to limit, control, and monitor staff spending without the need for separate expense claims or time-consuming accounting and paperwork.

Who can apply for a business credit card?

With most business credit cards any type of business can apply, from sole traders to partnerships, charities and multinational corporations. It is not generally the business type or the structure of a business that determines its acceptance or rejection on a credit card application, but more its creditworthiness and general eligibility.

In terms of eligibility, you must be able to prove that your business is based in the UK and that it has a good history of managing credit. In general terms, the higher the credit score (based on turnover and profit), the better rates or rewards the business will be offered. It is worth noting that in the case of a start-up company, or a sole trader, the credit score and income of the owner or its directors will be considered instead.

It is also worthy of note that some business credit card providers only offer to businesses that have been trading for a minimum period of time (typically 2 years) and some state a minimum turnover in order to be considered. With this in mind, it is always advisable to check the basic eligibility criteria before applying for a business credit card.

Benefits of having a business credit card

A business credit card allows the cardholder to separate their own private funds with the company – this can be particularly useful to a sole trader.

Whilst the comprehensive purchase protection of Section 75 of the Consumer Credit Act 1974 does not apply to business customers, many business credit card providers do offer free purchase protection for a limited amount of time, typically around 56 days.

If your company regularly purchases goods or services online or over the telephone, a business credit card can prove to be a useful tool, with the interest free credit, and without the need to set up an account with every supplier and invoice separately.

Perhaps the most tempting benefit to a business credit cardholder is the generous rewards and incentives they are offered when they first take out the card and later when they spend on their card. Rewards and sign-up bonuses vary from card to card, but many include free annual travel insurance cover, free purchase protection, rewards points scheme or even cashback schemes.

Business credit cardholders can also provide supplementary business credit cards to their employees, allowing them to pay for work-related items quickly and easily. Not only does this avoid the need for expense claims forms and other paperwork, but it can also help monitor business spending and simplify the accounting process, not to mention maximising the aforementioned rewards and benefits.

Last, but in no way least, when business credit cards are used sensibly and either paid off in full every month, or paid regularly in instalments but always on time, they can help to build up credit scores. This is particularly important for sole traders and start-ups, where personal credit scores can influence future access to finance.

Do business credit cards have any disadvantages?

There are a number of benefits to using a credit card for a business, but like all forms of borrowing, they also come with some drawbacks.

If the business credit card is being used to borrow money, rather than just assist cash flow, it can become quite expensive. Interest rates tend to vary between 15.9% and 34.9% APR, so carrying a high balance will prove to be extremely costly.

When handing out supplementary cards to employees, the business may face additional charges. These aren't necessarily very high, but it is something to be aware of if the business has a large workforce.

How much do business credit cards cost?

Given their enhanced rewards and benefits, business credit cards are more likely to feature an annual fee than their counterparts for individuals. There are some that are free, but those that do charge can cost anywhere between £25 and £150 per year.

The main cost incurred on any credit card outside of an annual fee, is the interest that is charged if you leave a balance to roll over from month to month. With this in mind it is important to pay attention to APR (annual percentage rate) when comparing business cards, especially if there is a chance that your business may not be able to settle the account every month.

Other common fees found on business credit cards are international purchase fees. These are often represented as a percentage of the transaction, rather than a fixed amount, which would prove to be a major factor if your business carries out a lot of transactions overseas, or purchases high value items abroad.

Choosing a business credit card

With so many different business card providers offering a dizzying array of cards, which themselves have different annual fees, annual interest rates, sign-up bonuses, benefits and rewards, as well as application restrictions, it is important that business owners carefully consider firstly which cards they will be eligible for. It is worth remembering that multiple failed credit card applications will negatively affect your credit score.

From the list of cards a business is eligible for, it is important to consider what the business owner wants or needs from such a card (for example, whether the 56 day interest free period is worth more to their business than a concierge service they may not regularly benefit from, or whether receiving cashback on purchases would be more beneficial than free travel insurance).

From there, it should be considered how the business will use the card, including how much they are likely to spend (as this may affect the rewards they receive), and where they are likely to spend (as purchases abroad will often incur further charges, but many of the benefits of some cards are based on air travel), and cards should be compared side by side to see which offers the most based on a business’s projected expenditure and behaviour.

Both the interest rate and the annual fee on any card should always be considered together, as while one card might offer a relatively low APR, the £100 annual fee it charges could wipe out any financial advantage, depending again on your projected spend.

Finally, it is also worth noting that some lenders will only offer business credit cards to their existing banking customers. If that is the case, it is important to compare the bank account on offer before making an application.

Are there any alternatives to a business credit card?

Yes. In the UK card market, there are now a number of prepaid business cards that can prove to be a viable alternative to a business credit card. The major difference between a prepaid card and a conventional credit card, is that the prepaid cards don’t offer any sort of revolving credit – a prepaid card, as the name implies, must be pre-loaded with funds before use. However, if you simply want a way of controlling, monitoring and recording your own business expenses, or those of your employees, then it can be a useful card indeed.

Whilst prepaid cards don’t generally offer the same rewards or benefits of their credit card counterparts, their annual fees do tend to be smaller. For their fee, prepaid business card providers offer a range of useful services, such as business bank account facilities (Direct Debits and Standing Orders), free purchase protection, and some accounts come with a free app, which can be used record receipts, and reconcile accounts in real time, reducing the risk of lost paperwork. The one advantage with a prepaid card is that there is no credit check when you apply, therefore so long as your business is in the UK, and you yourself are above the minimum legal age, then you are guaranteed to be accepted.

Another alternative to a business credit card, is a business charge card. Unlike prepaid cards, funds do not have to be preloaded onto a charge card, but there is no revolving credit facility either, therefore the balance must be paid in full every month. Because charge card balances are cleared in this way, the credit limit is high and often limitless. Such cards are targeted towards big spenders, and to attract such customers, charge card providers tend to offer very generous rewards, including worldwide travel insurance, access to VIP airport lounges, concierge services, purchase protection on all purchases, and very substantial points-based reward schemes, to name but a few. With such generous rewards comes a price, and business charge cards often charge a comparatively large fee. In order to obtain a business charge card, you will need to prove that your company is based in the UK and that you have a sound credit history.

In brief then, before you apply for any business credit card, it is worth carefully considering which particular rewards would be most beneficial to yourself and your business, and whether any charges, fees or interest rates will be worth paying in order to receive the benefits on offer. To fully benefit from any rewards or incentives the cards offer, you should always pay the balance in full at the end of the month, otherwise any potential rewards will be matched or exceeded by the interest charged.