Getting your first business credit card is a bit of a rite of passage. It's one of those steps that make the business feel official. But it's more than just selecting the one with the best sign-up bonus or nicest rewards program.
Many credit cards operate differently for businesses, and the one that works for you might be entirely complicated for someone else. Understanding a few things before applying allows you to select a card that actually fits how you're running your business and where you'd like to go.
Personal Guarantee vs. EIN Cards
This is arguably the most significant decision you'll make, and the crazy thing is that most don't realize there's even a choice. Most business credit cards require a personal guarantee - a guarantee by you as an individual that if your business fails to pay, you'll personally pay. The issuer will check your personal credit report and report to them as well.
Alternatively, some cards only require your Employer Identification Number (EIN) - your business tax ID. These don't even touch your personal credit. No personal guarantee. No personal credit check. The activity is reported only to your business credit report.
The downside? These cards are more challenging to get approved for, as issuers usually want to see that you've had a business for a year or two with stable revenue and business credit history. The first business credit card will likely not be an EIN-only card if the business is relatively new and hasn't established itself.
That's okay, though, because newer businesses can apply for standard business credit cards under personal guarantees. These assess your personal credit score over your business history; therefore, if your personal credit is stellar, you'll have less of a record attached to your newer business. When looking up business credit cards with ein only versus standards, consider where your business stands now and which one is more likely to get approved.
How Credit Limits Work
Business credit card limits can be much higher than personal cards. For this reason, they're also more limiting. Some issuers give lower limits to start and increase them the more you use the card and on-time payments. Others give incredible limits on their first offer based on the revenue and credit profile of the issuer.
The limit depends on a few factors. For those with personal guarantee cards, this also impacts approval; for example, if a person has a score of 700+, they may get approved for higher limits than someone with lower scores. These higher scores are also compared to other applicants and potential revenue, so if an issuer applies for a card claiming their business revenue is $100,000 annually, they're unlikely to receive a $50,000 limit easily.
Some business cards offer flexible spending limits (you can spend more than the set limit amount for certain purchases - although you may be charged a fee or need to repay it quickly), which is helpful for those with uncertain monthly expenses - but it's not unlimited, and rules differ by issuer.
Rewards
Some cards offer great rewards programs - but this factor shouldn't be number one when applying. Instead, before determining which card has the best rewards program, consider what areas your business spends money on.
If you make tons of travel expenses because you're constantly on planes and in hotels, airline miles or hotel points make the most sense as bonuses (not cash back). If you use a lot of software or pay subscriptions, cash back might be better. Some cards even provide 3x points in specific categories - and this only helps if you consistently purchase those things.
Additionally, consider the fee attached to it (some cards have $500 annual fees!). While a card with an annual fee provides more reward potential, it's only beneficial if you spend enough time using the card to make up the cost of its fees; in many cases, no-fee newer cards with legitimate cash-back options work better than premium cards with extended options that no new business can explore.
How Business Cards Impact Your Personal Credit
Business cards are not reported as business cards but instead under your personal portfolio. Most issuers don't report (balance/credit card history) to credit companies unless they've messed up (90 days+ late or defaulting).
This means that while they use a higher balance for business purposes, it won't affect their utilization ratio - as long as they pay what's due on time. However, since payments aren't reported on time either, good track records still don't help boost personal credit scores.
However, if they default or have significant issues with one (which they shouldn't because of personal guarantee), it will absolutely report; essentially, because you're personally guaranteeing payment, you are still on the hook - and most will only establish consistency during the payment issue.
Business Structure
Many business issuers must have an established structure (LLC/corporation/partnership). Others can accept sole proprietorships using their Social Security Number instead of EIN. If you're operating solely as a sole proprietor without an EIN option, your options are limited now.
This matters in terms of future endeavors. For example, if you're planning to incorporate soon after you've established your business, it may be best to wait until after it's done to apply for cards together. If it's going to remain a sole proprietorship indefinitely, make sure the issuers you're interested in accept these types for cards.
Documentation Required
Getting a business card is way more paperwork than getting a personal one. You'll need your EIN (if you have one), Social Security Number, and formalized documents about your business and revenue/expenses.
Some issuers want information on bank statements or even tax returns - especially higher credit limits or EIN-offered cards - so having these documents handy before applying all at once eliminates lags when searching for files for issuers in between applying.
If you have a newer business with no taxes filed yet, that's okay; you'll need to approximate revenue gained thus far - be realistic about this number. Trying to inflate revenue to get approved gets tricky later when you can't document it.
Establishing Business Credit History Early
Your first business credit card will likely be your first step toward establishing consistent payment histories. If you plan on using it responsibly (paying on time and keeping balances under control), this will be the first step toward creating an establishment of reputable credit history for future funding options.
If they start their business journey with a card with a personal guarantee attached, that's okay; later down the line when they've established good payment histories for themselves, they can transition to EIN-only cards and make it a real reputable option later down the line based on that first approved card.
Consider Future Application Needs
When selecting your first card as a personal option, think about where your company stands now but also where it's going later. For example, while someone could assume a single-card option perfectly fits their needs now as a solo operation, what happens when they eventually start hiring employees?
Consider potential locations where multiple employee cards are advisable with their budgets per employee; features enable expense tracking over time that may seem like unnecessary expenses now will become necessary when daily transactions become overwhelming.
Making Changes
The right choice for your first business credit card doesn't have to be correct forever; many businesses swap cards or adopt secondary cards as they get older and their needs change.
Instead, find something that works well with where you are now as long as it helps build credit history and proper professional evidence recommended by subsequent creditors down the line.
Plus, find cards you'll actually be able to qualify for based on terms/rewards/rate in which they'll work for you; avoid appealing options simply because they look impressive but ultimately don't feature anything you'll use. Even no-fee straightforward cards used continuously and correctly outweigh premium cards that provide services but fall flat for your logic.
The right first business credit card will ultimately give you access at times when you need it most while establishing enough credibility throughout creating clear expense tracking - that's all that matters in the beginning!
