Stop! Before You Sign Up for a Business Credit Card, Read This

Let’s say you need help financing your new business. You’ve put $10,000 of your own money in, and maybe your parents added another $5,000 – yet you find that it still won’t be enough. You run the numbers, and discover you need another $5,000 to pay for this and that over the next three months before your customers can float the business.

What to do?

A bank loan could take some time to obtain, but you need financing now. What’s another option? Many people turn to a business credit card.

A 2014 survey of small business owners by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia found that credit cards were the third most popular type of funding, with 19% citing it as a primary source of funding. (Here’s an expert guide to business credit cards.)

Business credit cards can allow you to rack up serious travel or cash-back rewards, and they can give you fast access to credit when you really need it. But like riding a horse, with fast and rewarding comes the need to pull in the reins. You’ve got to be in control.

They’re a Different Animal

Sure, a business credit card looks just like a personal one, and you can swipe (or now “dip”) it like one. But when it comes to federal protections they can be quite different. Things like protection from universal default, interest rate increases at any time and for no reason, and floating due dates don’t apply to business cards like they do to personal ones. Some business credit card issuers have extended some of these protections to the cards they offer to their cardholders, though.

So unless you are confident you won’t carry a balance on your card, and will be organized enough to always pay on time, you’ll want to make sure you read the fine print.

You May Be Stuck With the Tab

What happens if you give a card to an employee and they use it to take a trip to Vegas? You may be out of luck. Charges made by an employee who was authorized to use the card may not be considered fraudulent. Just take a look at the fine print on Visa’s Zero Liability policy: “Financial institutions may exclude from the Zero Liability policy a transaction made by a person authorized to transact business on the account and/or a transaction made by a cardholder that exceeds the authority given by the account owner.”

This isn’t all that different from personal credit cards, where you can be held responsible for charges if you give your kid the card to use and they spend more than you told them they could spend. But business owners who don’t keep close tabs on what their employees spend on these cards could be in for an expensive surprise.

There May Be More at Risk Than You Know

Because corporate credit cards are relatively easy to get if you have good credit, it can be easy to overspend. After all, there is no banker asking you why you want to borrow, or how you plan to spend the money. That’s not necessarily a bad thing; it can give you a lot of flexibility, after all. As I talk about in my new book Finance Your Own Business, most of these cards require a personal guarantee, which means if your business runs into tough times and defaults, the issuer can go after your personal funds or certain assets to try to collect.

So despite these potential drawbacks, why would you choose a business card over a personal one? There’s a very good reason: These cards can allow you to keep your business and personal credit separate. Most of these cards are not reported on your personal credit reports unless you fall behind or default, though at least one major issuer reports all business credit card activity on the owner’s personal credit reports. (You can see how business credit is potentially affecting your personal credit by getting your free credit report summary on Credit.com.) This means that if you need to make a large purchase, use your card heavily to earn rewards, or carry a balance from time to time, that activity won’t hurt your personal credit scores. Which is good, because you really should be able to live outside your business.