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 Is a Good Debt to Income Ratio?
Unfortunately for many, debt is simply a part of their life.
As you likely already know by now, there are good forms of debt and not so good forms. Some, like student loans, a car loan, or a mortgage, can help lead to bigger and better things. After all, real estate tends to go up, most need a car to get to work, and university grads do tend to make more than their lesser educated peers.
But that doesn’t mean people should strive for a limitless amount of good debt. The last thing you need is all your cash heading out the door in the form of various payments. That leaves nothing left for necessities like food, clothing or utilities.
Life is a delicate balance. Most of us can’t afford to buy everything we want. But some go in the exact opposite direction and live a simple life free of all forms of debt because they’re petrified of getting in over their head. The ideal solution is somewhere in the middle. Having some debt is just fine. You just have to figure out how much is best.
Let’s take a closer look at what is a good debt-to-income ratio. Just how much can you afford to borrow, anyway?
The Basics
Let’s start with a closer look at what exactly a debt-to-income ratio is.
Simply put, it’s the percentage of your income that gets spend on debt each month. For instance, if you make $5,000 per month and spend $1,000 per month on debt payments, you have a 20% debt-to-income ratio.
On the surface, it’s a simple concept. It gets a little more challenging once we delve a little deeper into the topic.
For instance, should we use gross income – income before deductions like taxes and Social Security – or should we use net income when figuring out a debt-to-income ratio? Most argue we should use net income, since it’s not like taxes and other deductions are optional. But others say we should just create a reasonable debt-to-income ratio based on gross income that factors in these issues.
Another wrinkle in debt-to-income ratios might be how aggressively you tackle your debt. Take mortgages as an example. Some folks choose to take a 15-year mortgage to tackle that debt quickly. Naturally, that increases their payment. So, they might have a big debt-to-income ratio, but it’s self-inflicted.
We can continue to add variables all day, but the point is clear. A debt-to-income ratio is a concept that becomes more complex as we add variables to it. Most folks stick with a simple version when they look at their own personal finances, which is a smart solution.
What’s the Ideal Debt-to-Income Ratio?
Perhaps the best source I’ve seen for considering your own debt-to-income ratio comes from the Canadian government.
The Canadian Mortgage and Housing Corporation (CMHC) is an expert in both mortgages and housing. This Canadian government agency has crunched the numbers and identified what percentage of someone’s income can be safely spent on their debt obligations.
After years of research, CMHC has come up with a conclusion that works well. They figure people can spend up to 42% of their income on debt. Note that this always includes a mortgage payment as well. Even if you’re just a renter, I’d argue this ratio still makes sense. After all, you need a place to live. This necessary payment is essentially the same as having debt.
CMHC’s debt service ratio can give us a clue as to how much non-mortgage debt is ideal too. You see, there are two debt service ratios the company uses to determine how much house someone can afford. They say the average person can afford to spend approximately one-third of their income on their mortgage alone.
Combine that with the total debt service ratio, and the conclusion is clear. A good non-housing debt-to-income ratio is approximately 10% of your total income.
The CMHC calculation isn’t 100% ideal – for instance, it doesn’t factor in housing costs like property taxes – but I’d say it’s pretty darn reasonable.
How to Bring Your Debt-to-Income Ratio Down
The easy way to bring your debt-to-income ratio down is to pay off your debts. This much is obvious.
This is where the debt snowball effort can really shine. Say you have a small $2,000 debt but it requires a $400 monthly payment. Putting all your effort into eliminating this small debt will free up cash flow while lowering your debt-to-income ratio significantly.
Most debt isn’t that simple to eliminate, however. It’s long-term debt like student loans or a mortgage. There are only two ways to get your debt-to-income ratio down in this scenario.
The first way is to refinance these loans into something with a lower monthly payment. This will bring short-term relief, but it will inevitably cost more interest in the long run. You must weigh this option carefully before going down this path.
The other is a much better solution, but I’m the first to admit it’s not easy. The best way to decrease your debt-to-income ratio is to increase your income. The debt stays the same, but you have more disposable cash for everything else in your life.
It isn’t the 1950s anymore; making more money isn’t as simple as requesting a meeting with your boss. But it’s certainly not impossible. Easy ways to increase your top line might be getting overtime at work – assuming it’s even offered – or taking on some sort of side hustle.
The Bottom Line
It’s important to keep your debt-to-income ratio low. If you don’t, you run the risk of eventually being overwhelmed with debt.
Typically, you’ll want to stay within CMHC’s guidelines and keep your total debt-to-income ratio in the 40% range, a number that includes housing. It’s a reasonable amount to spend whether you’re renting or paying off a mortgage.
If you find yourself paying too much towards debt, don’t sweat it. You can take actionable steps – like paying off your smallest loan quickly to free up cash flow – to make your situation better. And increasing your income is also a good strategy.
Spending the correct amount of your income on debt will ultimately lead to a healthy financial life. You might not be able to afford everything you want but keeping your debt to a reasonable level will ensure a lifetime free of financial worry.