The tips and traps of business credit cards

On the upside, business credit cards offer convenience and security, the easy management and tracking of business expenses and staff spending, as well as reward schemes. Credit cards can also help businesses weather periods of reduced cashflow.

Some of the potential pitfalls of business credit cards are hefty annual fees, additional cardholder fees for employees and pooled limits on credit.

What is a business credit card?

A business credit card works in a similar way to a personal credit card, but the main difference is the business, not the person, is liable for the debt. Like ordinary credit cards there is usually an interest free period and after this the debt incurs interest.

While the card is in the business’ name, there can also be numerous sub-accounts for staff members who can be nominated as additional cardholders. All types of businesses, including sole traders, partnerships, companies and family trusts, can use a business credit card, so long as they have an Australian Business Number (ABN) and a good credit history.

What should you look for?

Interest rates on business credit cards can range from 11.41% to as high as 20.74%, so it pays to shop around. While the interest rate is an important point to consider, it is not the only factor.

There are many different types of business credit card facilities on offer and choosing the right one really does depend on the size of the business and how the card will be used. For example, having access to a large number of additional cards may not be necessary for a small business but would be essential for a large company.

Credit card features to consider

  • Interest rate – make sure staff are aware of the interest being charged on the card, particularly in relation to cash advances. Providers usually charge a higher interest rate on cash advance amounts which can be significant.
  • Application fee – this is usually zero for business credit cards, but can be as high as $300.
  • Annual fees – this is usually under $150 per year, but can range from nil right through to $1,200 for some premium cards.
  • Additional cardholder fees – these may apply if a business has more than one card attached to the account. There could also be a monthly cardholder fee added to the mix as well.
  • Other fees – there may be other types of charges such as penalties for late payments, going over the card limit and requesting duplicate statements. These vary depending on the provider and can range from $20 to $40.
  • Interest free period – this can range from 0-55 days. The number of interest free days will be of particular importance for small businesses using the credit card to assist with cashflow management.
  • Reward points – some cards include reward programs that allow businesses to accrue points for expenses. Some also offer insurance on purchases, which can be handy if a person leaves the store with their new item and damages or loses it before they’ve had a chance to add it to their insurance policy.
  • Number of cards that may be attached – a business can choose whether they want to add 10, 99 or even 9,999 additional cards to their account, with no maximum. The choice a business makes will depend on the number of employees it has.
  • Minimum repayment options – if the business is not paying the full balance each month, it is worth checking the minimum repayment options. The minimum repayments are usually a percentage of the account balance and could be in the range of 2% -to 5%.

The advantages

  • Easy tracking of business expenditure – most business credit card providers supply detailed reporting on the card’s expenses. These are specifically formatted to meet GST requirements which makes it easier for the business accounts. The tracking of expenses is also made easier by online access.
  • Managing employee expenses – spending limits can be individually monitored and customised to give added control over staff expenses.
  • Convenience – a business credit card removes the need for employees to use their own cards for business expenses and the hassle of claiming for reimbursement.
  • Security – business credit cards do away with the need to have large amounts of cash on site which is far better for security. Most credit card providers now also provide security alerts if they detect any unusual spending.
  • Interest free period – this is a real bonus for any business as it acts as an interest free loan and does not immediately impact the business cashflow.
  • Access to credit card networks – another big advantage is being able to access the VISA, MasterCard, American Express and Diners Club networks for business credit cards. These networks offer additional security options and reporting tools which can be attractive to businesses with a large number of staff.

The disadvantages

While there are many definite advantages to business credit cards, there are also some downsides to be aware of.

  • Pooled limits – business owners need to make sure they understand how their credit card limit works, as it could be an individual limit or a pooled limit. If it is a pooled and they want to put a large item on the card that month, it may be wise to check what expenses other employees have that month to avoid going over the limit.
  • Watch out for fees – there are so many different fees, so it’s a good idea for businesses to do a thorough investigation of what they believe the credit card will offer them and how they can minimise the charges. It’s important to have an understanding of when and why certain fees are triggered.
  • Reward points – beware reward programs usually come at the cost of an additional annual fee, so the business needs to weigh up the potential benefits before signing up. Some reward points schemes have come under fire for having to spend a lot to gain a little.

If managed carefully, there’s no doubt business credit cards can offer a wide range of benefits. But as always, business owners should do their homework so they get the right card to suit their needs.

–Dianne Charman is a financial planner for AMP.

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