by J. Tol Broome, Jr.
|Published in the May 2001 Issue of Anvil Magazine
If you have ever applied for a credit card for your small business, you were likely disappointed by the lack of flexibility in reporting, repayment plans and pricing. That is, of course, if you could even find a bank willing to set up a credit card in the name of your small business. But the new millennium has brought on new attitudes toward small business credit cards in the world of financial services. And this is good news for you and your small business.
Lynn Harton is the Small Business Center Manager and an executive vice president for BB&T in Winston-Salem, NC. He says that business credit cards are one of the fastest-growing banking products in the industry.
"In 2001 business credit cards will be one of the most aggressively marketed products for small businesses," promises Harton. "It is a relatively new product in our industry and there is a growing realization that the market potential has not yet been tapped. This is good news for small business clients, as the features and attractiveness of the product will improve even more."
BB&T was recently named the #1 Small Business-Friendly Bank in the country by the U.S. Small Business Administration. Not surprisingly, Harton reports that BB&T's growth rate for business credit cards over the past three years has exceeded 50% annually. Says Harton, "Even if you have $200,000 sitting in your checking account, you need a business credit card."
WHAT IS AVAILABLE?
Alice Magos writes AOL's monthly "Ask Alice" cyber-column for the CCH Small Business Owner's Toolkit. She concurs with Harton that the availability of business credit cards has grown rapidly in recent years. "The competitive banking environment has forced many institutions to seek new sources of income and develop new financial products that meet changing needs," offers Magos. "One of the least-publicized developments has been the growth of the small business credit card."
Magos says that VISA, MasterCard and American Express all have committed significant resources to the promotion of new business credit card programs. This is evident in a search of the American Express web site (www.americanexpress.com) that reveals the roll-out of Blue For Business, "a whole new card for a whole new way of doing business." Features include a 3.9% introductory Annual Percentage Rate (APR), an ongoing APR of prime (currently 9.5%) + 3.99% and special savings with e-commerce partners. Cards offered by banks such as BB&T (www.bbandt.com) and Wells Fargo (www.wellsfargo.com) offer points for free travel and rental car discounts, overdraft protection for the checking account and rental car, travel, and accident insurance coverage.
The posted pricing for the American Express Blue For Business card is typical. Most banks now charge a variable rate ranging from prime rate to prime + 6%, rather than the traditional 18% that would have been charged on unpaid balances a couple of years ago. And many banks now offer business credit cards with no annual fees. Harton says that the primary determinant of the interest rate and annual fees is the perceived risk of the client based on an analysis of the personal credit history and business outlook.
THE BENEFITS OF A CREDIT CARD
Harton points to a number of benefits of a business credit card that have contributed to the rapid growth in issuance in recent years. "I think the biggest benefit is the flexibility offered by a business credit card," offers Harton, who has been in banking for 18 years. "The card operates just like a personal credit card and is just as easy to use for the business owner."
According to Harton, other benefits include: Multiple cards can be issued to different employees with different credit limits and even varied usage profiles. Most banks offer an interest-free grace period of up to 29 days on purchases. Some banks allow the credit card to be tied to the business checking account for overdraft protection. Some cards include checkwriting privileges directly against the credit limit. Management reports provide detail on spending by employee and merchant (i.e., travel, office supplies, inventory supplies, etc.). Facilitation of mail-order transactions.
THE USES OF A CREDIT CARD
According to Harton, there are two primary uses for a business credit card: 1) to facilitate purchases and major expenses; and 2) as a line of credit. A business card that is used for the former purpose is paid off when the bill comes with little or no interest expense ever paid. The card provides a convenient, low-cost method for obtaining supplies and for incurring expenses.
When used as a line of credit, the credit card will be used for similar initial purposes. The big difference is that the card balance is not paid off when the bill arrives. Harton warns that the extended use of a business credit card as a line of credit is costly.
"While business credit cards are very flexible, ease of use can be the biggest problem," explains Harton. "If you are starting to carry a big balance and can't make the payments, then something is wrong. If that is the case, then it is time to get some advice from your banker or CPA.
"If you will need $25,000 or more for working capital, then you should consider going to the bank for a conventional loan or line of credit rather than using a credit card," continues Harton. "A credit card can be a very expensive way to finance a small business."
Magos confirms that credit card balances should be repaid as quickly as possible, pointing to the minimum monthly payment requirement (typically 2-3% of the outstanding balance) as a potential trap. "Don't let the charge card companies keep you in debt forever," warns Magos. "Depending on the interest rate and minimum payment provision that applies to a charge card, if you make only the minimum required payment each month, you might not pay off the balance for over 20 years!"
WHAT IS REQUIRED TO OBTAIN A BUSINESS CREDIT CARD?
Harton says that the primary underwriting factor considered by banks for credit cards for micro-businesses is the personal credit history of the business owner. If you have paid your creditors in a timely manner in the past, then your chances of getting a business card approved with a small limit of, say, $5,000 are pretty good. Of course, the inverse is also true if you have a poor personal credit rating.
Another requirement for most business credit cards is for the entity to have been in business for at least two years. To apply for a card, you will be asked to fill out a one-page application. For credit limits of $20,000 or higher, you also might be required to submit tax returns or CPA-prepared financial statements on your business.
As for documentation, most banks allow the application also to serve as the promissory note and loan agreement, so you should study the terms and conditions when you apply. One condition that you will find in nearly all cases is a requirement that you personally guarantee the debt of the business. This provision allows the bank to collect from you personally if the business is unable to pay. The reason it is required is that banks view small businesses and their owners as essentially one and the same. As the owner of your small business, you will be expected to demonstrate your commitment to the long- term viability of the business by providing your personal guaranty.
WHERE SHOULD YOU GET A CREDIT CARD?
So, where should you get a credit card for your venture? As aforementioned, you will likely have many choices if you have a good personal credit rating and you have been in business for at least two years. Harton advises that you closely consider the overall credit needs of your business before making a final decision.
"If you have no other significant credit needs and non-sophisticated deposit product needs, then you probably should look for the best deal," says Harton. "Shop for the lowest APR and annual fees and consider other attractive benefits like travel points and discounts."
If you have other credit needs, however, Harton advises you to start with your existing bank, even if the APR is a point or two higher than the mail solicitation you just received. Says Harton: "If you look at your entire banking relationship, you will find it is worth your while to start with your primary bank when setting up a business credit card."
Why is this so? Harton points to four key reasons:
1. A bank that is familiar with your business will be more flexible with the underwriting if you want a higher limit or have a minor blemish on your personal credit report.
2. It will be easier to get limits increased, particularly on short notice, by a bank that is familiar with your business.
3. More flexibility for deferring payments if this is ever needed.
4. Your bank will esteem your relationship even more. The more services you buy from your relationship bank, the better terms and more responsive overall service you can expect in your banking relationship.
If you don't already have a business credit card, you probably will need one in the near future. Many suppliers now require the use of credit cards for mail order or telephone purchases. And if you have continued to use your personal credit card for travel expenses, you have experienced the difficult task of sorting out business and personal expenses come tax time.
"Any small business owner ought to have a business credit card," concludes Harton. "It provides a much more flexible way to get supplies and to travel, and the management reports are excellent. My goal at BB&T is for every creditworthy small business that banks with us to have a business credit card."
Check The Fine Print
Not surprisingly, there are many variations in the fine print when it comes to business credit cards. If you see a deal offered that appears too good to be true, it probably is. Many banks use low "teaser" rates to attract new clients, only to zap them later with the fine print items.
Some banks that charge low interest rates have no grace period. This means that you start paying interest from the day you make your purchases-even if you pay your bill on time. And that interest can add up pretty quickly. On many cards, even if your balance is as low as $15, you have to pay a minimum finance charge of 50 cents. That's a whopping annual interest rate of 40%!
The length of grace period is just one of several fine-print items to study before selecting a card. Other criteria to consider include:
The long-term APR if a low initial APR is offered.
The point at which the late fee kicks in and the amount of this fee. Is it on the due date or 15 days later as with most credit cards? Is it a fixed amount or a percentage of the payment due?
The annual fee and other fees such as cash advance fees, overline fees, etc.
The default rate if you are late. Many credit card agreement automatically revert to a very high default rate (18% or higher) the first time you are late on a monthly payment.
The demand feature. Most credit card agreements allow the bank to demand payment for the entire balance if the owner's personal credit score falls below a certain level.