Paying for Business Expenses Applying for a business credit card is something a small business should seriously consider for itself. Business credit cards can provide a range of benefits to a business. They allow a company to build up credit for better borrowing conditions down the road. They’re also quite easy to apply for. In this article, we’ll go over how to apply for a business credit card and other important points to note. What Is a Business Credit Card? A business credit card is a credit card that is intended for business expenses. These cards are not meant for any individual’s personal use, but they are available to businesses of all sizes. What Is a Business Credit Card Used For? Business credit cards are meant for business expenses, and as such, they come with several perks that you wouldn’t get with a normal credit card. Business credit cards typically have far higher credit limits than normal cards, but they are also harder to qualify for. [youmaylike] As a business phenomenon, business credit cards vary their offers greatly, and certain cards are meant for certain businesses. They are also highly customizable when it comes to individual payment terms. Businesses don't always have consistent incomes like individuals do, and business credit cards handle this problem. These cards are used to gain access to a long line of credit, to control employee spending on business expenses and more. One of their other common uses is to make accounting easier, as putting all business expenses on one separate account makes reporting to the Internal Revenue Service easier. In the end, there are many uses for a business credit card. Why Would I Need a Business Credit Card? You might not need one, but if you run a business, you’ll be leaving money on the table by not at least looking into them. Business credit cards can solve many of the problems business owners face. If you need employees to make purchases for the business, a business credit card is the safest option. These cards can be given to authorized users, a status you can easily give to any of your employees. From here, these cards make it easy to monitor employee spending and spot any discrepancies. You can attach customized user privileges to each card to limit spending and place limits on where the card can be used. As mentioned, if you feel like your credit is too limited, business credit cards are a sure way around low credit. According to the American Bankers Association, the average monthly payment on a business credit card is twice as high as the average payment on a normal one. If you’ve found yourself annoyed with the Internal Revenue Service over the complicated reporting processes for business owners, you’re not alone. This is where a business credit card can solve another problem. Simply handing over your business credit card statements to your accountant will make them love you. It will also provide them with the information they need to predict future spending. Another great use for a business credit card is lifting your liability for debts. Liability for credit card debt is determined by the liability offered by the card. If you’re using a personal credit card for business expenses, you are liable for all debts. On the other hand, if you use a business credit card with commercial liability, your business is liable for any debts, which changes the game. Keep in mind that some cards offer joint liability, which leaves both you and your business liable for any debts. Make sure you know what you’re getting into before signing any paperwork. Lastly, just as personal credit cards offer rewards programs, so do business cards. The main difference here is that business credit card rewards are tailored to your business needs. How to Apply for a Business Credit Card Before you apply for a business credit card, you should make sure you’re eligible. For the most part, you only require the following to be able to apply for one: A legal name for your business. A business structure to apply with, such as a Limited Liability Corporation. An explanation of the nature of your business. You’ll typically be given a list of industry types to choose from. A tax ID number issued by the Internal Revenue Service Your roll in the business you’re representing Various business/financial information including: Annual revenue. Number of employees. Length of time in business. Estimated monthly expenses. If you have this information ready, you can apply for a business credit card. At this point, it would be wise to shop around and find the best option for your business. Your decision on the business credit card you choose will have larger ramifications than your choice of a personal credit card. Applying for a business credit card is much the same as applying for a personal one. There are a few differences, but the main thing to remember is that business credit cards are taken more seriously than normal ones, so you’ll have to face a higher bar of entry. This doesn’t mean getting a business credit card is hard, but it does mean you need to arrive more well-prepared than you normally would. To make things easier, you can prepare for certain obstacles in advance. You may need to sign a personal guarantee that you will pay off any debts. Also keep in mind that if you’re the one applying for a business credit card, and your business doesn’t already have one, they will conduct a personal credit check. It may be best to try to optimize your personal credit if you plan on applying for a business credit card in the future. Some Options at a Glance Here are some of the most popular options for small business credit cards: Chase Inc Business Preferred This is a great option for a few reasons. With the Business Preferred card from Chase Inc, you get 80,000 ultimate reward points when you spend $5,000 with the card in the first three months. The card also provides generic, but highly useful benefits for business owners. Business Platinum Card from American Express The Business Platinum is ideal for businesses that spend a lot on flights and travel. This card offers numerous rewards on flight and hotel expenses and makes sure you get something serious back if you use it for these expenses. Chase Inc Business Unlimited The Chase Inc Business Unlimited offers unlimited 1.5% cash back. While we’ve said enough already, they also offer several other perks that are overshadowed by their first one.
What Can You Afford?
Debt is an unfortunate reality for the majority of Americans.
Some people think debt is always bad. They’ll repeat mantras like “there’s no such thing as good debt,” likely remembering their days of struggling with student loan or credit card debt.
But these folks are short-sighted. The important thing to remember is debt is a tool that can be effectively used to your advantage. Borrowing $30,000 to spend on an education that will increase your earning power by $15,000 per year is a fantastic investment, even if it takes years to pay it back. So is buying a sensible car so you can get to work or getting a mortgage to protect yourself from greedy landlords raising rents in a hot housing market.
There are two important things to remember when taking out debt. The first is to always use debt to buy assets, not liabilities. Borrowing to buy a house or finance an education is fine. Using credit cards to finance a vacation or some other consumable isn’t a good idea. Second, make sure you have a good idea of what you’re signing up for. Think about your new potential debt critically before signing up. Can you really afford it? Is it really necessary?
We can help with that second part. We’ve created a loan calculator you’re going to want to consult before signing on the dotted line. Let’s take a closer look at how it works as well as some general tips for getting out of debt as quickly as possible.
The Loan Calculator
This calculator will break down what your loan payment will be, but you’ll need to provide it with the following inputs first:
Loan Amount
This doesn’t need much explanation. This is the amount you’re going to borrow. Make sure you add any loan fees (if applicable) to the face value of your loan.
Interest Rate
Another simple category. This will be prominently displayed on any loan agreement.
It’s fine to input an estimated interest rate if you’ve just begun the process of shopping for a mortgage or car loan. A little online research will reveal what the going rates are for each type of loan.
Loan Period
This is also called the amortization period. It’s how long the loan will take to be paid back. Car loans will typically stretch for anywhere from three to seven years, while mortgages are a 15- to 30-year commitment.
And that’s it. The calculator will take these variables and use them to determine your loan payment. Feel free to play around; you’ll see how extending the loan period will make a loan more affordable. But remember, doing that will increase the total interest cost of the loan.
Next we’ll take a look at different types of loans you might get, and what you’ll need to know before agreeing to the commitment.
Types of Loans
A loan can be arranged on any asset, provided you have a lender and a borrower agree to terms. But ultimately they boil down to two different kinds: installment and revolving loans.
We’ll start with an installment, or fixed, loan. This is your standard loan where a borrower takes a fixed amount and slowly pays it off over a period of time at a fixed payment plan. The banking industry refers to these as installment loans.
A car loan is an installment loan. So are student loans. A mortgage is as well, although the payment could fluctuate if you’ve taken out a variable rate mortgage. Those mortgages aren’t so common nowadays, since they didn’t tend to work out so well for borrowers in 2006-08. Most borrowers prefer the security of a fixed monthly payment.
Typically, a standard installment loan will never stretch out for longer than the life of the underlying asset. This means that a car loan must be paid off relatively quickly, since the lender doesn’t want a borrower to continue paying something off after it has become worthless. An education or a house are both assets that can last decades, so banks allow borrowers to pay them back slowly. These loans also tend to have lower interest rates because they’re backed by secure assets.
Compare that to a payday loan, a short-term loan that only lasts a couple of weeks. Payday loans come with the highest interest rates of all because they’re given to folks with poor credit who have just admitted to having money management problems. You’re looking at interest rates of 25% over just a week or two. It’s best to avoid payday loans at all costs.
Next, let's talk about revolving loans, flexible loans that can fluctuate depending on how much the debtor needs to borrow. The two main types of revolving loans are credit cards and lines of credit.
A revolving loan will give the borrower the flexibility to borrow up to a predetermined limit with interest being charged on just the balance owing. Repayment terms will be more flexible as well, with a borrower being allowed to pay as little as a small monthly minimum or a maximum of the entire balance.
Revolving loans can be secured against assets. Home owners commonly take out lines of credit that are secured by the equity in their property to pay for home improvements or to just consolidate other bills. These special lines of credit — which are called home equity lines of credit (or HELOCs) — are offered at similar rates to mortgages since they’re secured by the value of the home.
Unsecured lines of credit exist, but most folks access revolving credit through credit cards. An unsecured loan doesn’t have any specific asset a lender can seize if the borrower stops paying. These loans are only secured by the general credit worthiness of the borrower. This works most of the time, since the majority of people don’t default on debts unless they have no other choice.
Credit cards are extremely flexible and offer a low, mandatory monthly payment. Borrowers pay for this privilege through high interest rates on any outstanding balance. Credit card interest will set you back anywhere from 1-3% per month.
Remember, credit cards aren’t secured by anything physical. If you stop paying your credit card, the bank is going to have to do some work to get you to pay. Interest rates charged to credit card borrowers reflect that risk.
Picking a Lender
Many borrowers are so worried they’ll get denied a loan (despite excellent credit) that they take the first offer put in front of them. Many banks count on this when applicants want a mortgage or car loan. A little negotiation can go a long way.
It’s amazing how threatening to walk away from a loan will get a lender to lower their interest rate. Even a reduction of half a percent can mean a lot of money over the life of a loan, especially when we’re talking long-term mortgages.
It also makes a ton of sense to shop a few different lenders before making a big purchase. Leverage each lender against the previous one until you come up with the best rate. A mortgage broker can help with this when buying a house, especially if you don’t have the time nor the ambition to talk to a few different lenders.
Interest rates aren’t everything, however. You’ll also want the flexibility to make extra payments on a loan if you’re serious about slaying debt quickly. Sometimes a bank will give borrowers the lowest rate but will lock them into a contract that won’t give any flexibility.
Paying back a loan early can result in some serious savings. Say you borrow $30,000 over a five-year term at 5% interest. If you take all five years to pay back the loan, you’re looking at interest costs of almost $4,000. But if the same loan is paid back in three years, the total cost of borrowing is just over $2,300.
Who couldn’t use an extra $1,700? That’s how much you can save paying back a loan early.
Don’t forget about other factors when choosing your lender. Some banks offer excellent customer service. Others might offer free banking packages for borrowers. These perks matter, especially for somebody with good credit who is likely receiving similar offers from every lender.
Getting out of Debt
It doesn’t matter if you’re wallowing in debt or have a relatively clean personal balance sheet, it’s still a good idea to get out of debt as quickly as possible. You want to be earning interest, not paying it.
Good debt habits mirror good personal finance habits. To get out of debt quickly you’ll need to free up cash dedicated to other expenses and funnel it toward clearing up loans. This means spending less on everything, especially the big three expenses of housing, transportation and food.
One way to minimize your debt before you even start is to reduce the amount you borrow in the first place. If your bank tells you a $30,000 car loan won’t stretch your budget, opt for a $20,000 loan instead. Do the same thing with your mortgage. You’ll free up hundreds of dollars each month, which can then be thrown at the loan to pay it down all the faster.
Many people have had success using the snowball method to get rid of debt. You tackle the smallest debt first, throwing as much as possible toward it while making minimum payments on your other debts. Once the lowest balance is eliminated, move to the next lowest.
The snowball method gives borrowers psychological victories, which will encourage them to keep going. And it frees up having to make so many minimum payments. But it doesn’t factor in interest rates charged. You’ll want to do the math and maybe alter the snowball method a little before starting.
Improving your credit score is another way you’ll spend less on loans over the long-term and get out of debt faster.
While the exact formula used to determine your credit score is a tightly guarded secret, there are easy moves you can take to improve your score. You’ll want to clear up any accounts that are delinquent. Reducing your current debt-to-available-debt ratio on your credit cards will also help. Applications for new credit will also reduce your score, so keep those to a minimum.
Ultimately, getting a good credit score comes down to paying your bills on time. As long as you keep your creditors happy, it’ll be reflected in your score.
Smart borrowers can also refinance debt to lessen the pressure.
Say you’re struggling with credit card debt, but still have a good credit score. You could apply for a debt consolidation loan at a much lower interest rate, which would immediately decrease your monthly payments. When done right, a debt consolidation loan will save you thousands in interest.
Many credit cards love these types of borrowers, and will offer low-interest balance transfers to entice them to switch card providers. I’d caution people to be careful before accepting one of these offers, however. Once the initial grace period runs out, you’ll be right back to the same high-interest situation with this new card. You’ll want to make sure a serious dent is made to that balance while the rate charged is low.
Ultimately, getting out of debt won’t be easy. It’ll require months — if not years — of sacrifice.
The Bottom Line
Debt gets a bad rap, especially from people who have struggled with it. Some of these naysayers go as far as calling debt “evil” and proclaiming there’s no such thing as good debt.
I disagree. Avoiding debt is a good idea, especially high interest rates offered by credit cards or payday loans. But when used intelligently, debt is a tool that can better your life in so many ways.
There’s nothing wrong with financing big ticket items like a house, car or your education, provided these are done responsibly. Keep your payments low and you’ll be fine.
This calculator will help you use debt better, and the tips provided will allow you to get out of debt quickly, minimizing the total interest.