There are many different aspects of running and maintaining your business. And while you try to keep up with deadlines, urgent business needs, the yearly joy of filing taxes, and managing your business finances, taking the time to find a business credit card can seem like a small detail.
However, this small detail can make a world of difference for your small business. Once you start using a business credit card you will be able to easily separate your personal and business expenses, not to mention have the potential to earn valuable credit card rewards in the form of travel rewards or cash back.
In this article, you will learn a few important factors you need to consider so you select the best business credit card for your home business.
1. How much do you spend?
Do you run a business that has consistent expenses such as purchasing inventory or supplies? Do you have regular spending on client gifts? Or do you have an upcoming project planned to revamp your home office with a new computer, desk, and other hardware?
If you know a rough estimate of how much you spend per year in business expenses, this can guide you toward which business credit card is right for you.
For example, if your expenses are modest, a business credit card with no annual fee may be the best option. If you have larger expenses, it may be justified to use a credit card that has an annual fee but also offers the chance to earn more lucrative cash back or travel rewards on your spending.
So, how should you determine if paying an annual fee pencils out for you?
2. How much should you spend on an annual fee?
Annual fees can seem a bit contradictory as it can feel like you are paying a fee to spend your own money. However, paying an annual fee can sometimes work in your favor. If you are unsure about whether or not the fee is worth it, here is a simple way to calculate if it makes sense for you:
- Step 1: Find two business credit cards you are interested in that offer rewards on similar categories of spending — one card with an annual fee and one without. As an example, we’ll use an annual fee of $295.
- Step 2: Using a rough projection of your expenses for one year, calculate how much in rewards you would earn with each card. Say, for instance, you anticipate spending $50,000 throughout the year. If the credit card with no annual fee earns you 2X points per $1 spent, you could earn 100,000 points. If the credit card with a $295 annual fee earns you 4X points per $1 spent, you could earn 200,000 points. If these points are worth 1 cent each (a typical valuation), that’s a value of $1,000 and $2,000 respectively.
- Step 3: From here, deduct the annual fee from your total and compare the two numbers. For the credit card with no annual fee, you’ll be able to pocket the entire $1,000 you earned. But for the card charging $295 annually, you’re left with $1,705 in earnings after deducting the annual fee.
As you can now see, a business credit card with an annual fee might actually be more valuable. Of course, this was just an example and these numbers will change depending on the card, but running this type of calculation gives you a great indication if an annual fee makes sense.
Keep in mind there is no “right” amount to pay for an annual fee. For some business owners, a card with no annual fee is best. For others, it may make sense to get a card with an annual fee of over $500 based on their spending and business needs, as well as the perks that the card may come with. Credit card annual fees are tax-deductible as well, so if you’re open to a business credit card with a large annual fee, remember that you can deduct this cost each year.
When it comes to annual fees, try to let go of any sticker shock and simply run the numbers. A credit card with an annual fee can often serve your business better than a card without one.
3. What type of credit card rewards will benefit your business?
Both personal and business credit cards offer two main categories of rewards — travel rewards or cash back. Earning these rewards is based on how much you spend with the card, in addition to any sign-up bonus each card might offer.
Deciding between cashback or travel rewards can be difficult, but one simple question can help you choose between the two. What does your business need more — working capital or eliminating travel costs? The answer to this question can quickly guide you to a credit card that will benefit your home business best.
If you’re trying to get your business off the ground, reinvesting cash from your credit card earnings back into your business might make the most sense. But what if your business has you traveling often? Or maybe you want to use the earnings from your business expenses to fund a working vacation? If this is the case, you might find more value in earning travel rewards.
While both types of credit card rewards can be worthwhile, deciding which can better benefit you and your business will guide you toward the right business credit card.
4. Will you use your business credit card for personal expenses?
The short answer to that question should generally be “no.” While internet rumors may tell you it is illegal to use a business credit card for personal expenses, it is not actually “illegal.” However, it is against the terms and conditions set forth by many credit card issuers. If a credit card issuer suspects you are not abiding by the terms and conditions, they can shut down the card and take back any rewards you earned.
Even if you can make the argument that a “one-off” personal charge was a business expense, it’s just not worth it. But a dispute with your credit card lender can be avoided entirely by keeping your personal and business expenses separate by having different credit cards for each.
5. Do you have what you need to apply for a business credit card?
The main component you need to apply for a business credit card is an employer identification number, known as an EIN. This number is used for tax purposes by the IRS. It is free and simple to obtain an EIN, and you can apply directly on the IRS website.
However, if your business is new and not firmly established, the credit card company may also ask for your Social Security number. This is important to note because if your business goes under, the credit card company can come after you personally if you give them your SSN.
In addition, the credit card issuer will ask you to state the type of business you are operating, how many years you have been in business, your annual business revenue, and your estimated monthly spend. The necessary information for each credit card issuer may vary some, but this is the core information you will need to have on hand for your application.
6. How many business credit cards should you have?
With all of this in mind, don’t feel as if you can only select one business credit card. In fact, you can have several cards, and this can help you truly get the most reward for your business expenditures.
If your business is on the less-complex side, one business credit card might suffice — especially if the reward categories for spending on that card align well with your expenses. However, if you have business expenses that vary in size and type, you may want to consider multiple credit cards. One card might reward you best on internet and phone expenses, while another gets you the most on travel and dining. To ensure you’re earning the most rewards or cash back, multiple credit cards might be the way to go. With multiple cards, you will also have the potential to earn several sign-up bonuses.
However, this strategy does take a bit more thought and organization. And, if you decide to open more than one card, be sure to space out your applications as each one will impact your credit score, even if just by a few points. But the end result of having multiple business credit cards could be many additional dollars in travel rewards and/or cash back.
Bottom line
Being a small business owner or telecommuter comes with a ton of perks, and one of the lesser-known benefits is the potential of having a business credit card. These cards are highly valuable and not available to the general public. However, a business credit card can seem intimidating and harder to choose than when you picked your first personal credit card. Or, you may think it isn’t necessary for your specific business.
If this sounds like you, be sure to consider the perks of having a business credit card. You can keep your personal and business expenses separate, earn valuable rewards that can potentially save you thousands of dollars, and enjoy additional perks such as travel insurance. So be sure to look at your business credit card not as a liability, but as a tool that can help you build and scale your business.
