The Business of Business Credit Cards

Managing my business

26 February 2016

When running a business, choosing the right type of funding can be a challenge. There are many options available to explore and there is no one-size-fits-all solution. This means it is important to weigh up your options carefully and consider your business type, business goals and current financial situation. We know information on this topic isn’t always easy to navigate, which is why looking at various Funding Options can be a good place to start.

For many businesses, a business credit card is a popular funding option, as it can be a convenient way to manage day-to-day expenses and smooth cash flow. If you are thinking that a business credit card might suit you, here is some information to help answer the more common questions.

Do I need to separate my finances?

When considering a business credit card, it helps to start by determining exactly how the card will be used. If you make a lot of business transactions and find it difficult to separate out your business and personal expenses at tax time, having a business credit card helps to keep everything separate. However, if you are a sole trader that only has a few expenses, and tax time is pretty straight forward, you will want to make sure you’re getting value for the annual fee you’ll pay.

It is also important to look at how many people will be making payments in your business. Bankwest’s General Manager for Small Business, Antonia Albanese, points out that “business credit cards can be particularly useful to allow monitoring and control of individual spending, and also ensuring your team is empowered to make small purchases to help your business grow”.

What else do I need to know?

The following information may answer some of your questions and help you decide if a business credit card is right for you and your business.

CONSIDERATIONS WHAT THIS MEANS
Cash Flow
Business credit cards can be used for making business transactions or for short-term cash flow assistance (instead of having to find cash or apply for other business finance).

You’ll have access to a continuous cash flow, a revolving line of credit (vs. fixed pay down loans). Generally, this reduces the amount of petty cash required and may give you a financial cushion for when accounts receivable are behind or sales are slow, and the business is short on cash.
Higher Interest Rate
There is often a higher rate of interest for credit cards than business loans or personal credit cards1.

The convenience and ease can come at a price – a higher interest rate. This means your business credit card requires careful monitoring to avoid over-spending or incurring additional fees or penalties.
Unsecured
Business credit cards are usually an unsecured line of credit.

Debts are not secured with an asset or don't require that the cardholder put up collateral, contributing to the potentially higher interest rate.
Liability
Depending on the card you choose, the debt can come under personal or business liability.

Some business credit cards require a personal-liability agreement to repay debt. Any late or non-payment could impact your ability to personally borrow money.
No Fixed Rates
You are unable to fix the rate on a credit card like you are on a fixed loan, because it is a rolling debt.

Banks retain the right to change credit card interest rates at any time.
Annual Fees
Many business credit cards have an annual fee associated.

Having a business and personal credit card means you could be up for two annual fee payments.

FEATURES WHAT THIS MEANS
Credit Limit
Business credit cards typically offer higher credit limits than personal credit cards (subject to credit approval).

Having a higher credit limit means access to more cash when your business needs it, increasing your business' purchasing power.
Transaction Tracking
Your business transactions will be separated out for you when filling in your business activity statement and calculating tax deductions at tax time. You can also get expense management reports to assist with tracking business expenses.

A reduced amount of time spent reconciling accounts. Efficient expense calculation for tax time using a year-end account summary can help bookkeepers track, categorise and manage expenses. Expense management reports can assist with managing cash flow and forecasting outgoings.
Individual Spend Limits
Some cards come with the ability to apply spending controls by setting individual spend limits for each cardholder and an overall limit for the business credit account.

Spending limits help to control business expenses and monitor employee spending.
Rewards
Business rewards programs are available on some cards.

The ability to redeem business-related rewards, such as cash back, travel or gift cards.
Interest Free Days
Some business credit cards come with a certain number of interest free days.

Pay no interest on purchases for up to offered days (i.e. could be for up to 55 days).

How do I choose which card is right for me?

If you make the decision to apply for a business credit card, you also need to choose which type of card is right for you. Again, this comes down to your individual and business needs and there are a whole range of things to consider. Here are a few pointers from Paul Vivian, General Manager for Products and Pricing at Bankwest:

  • If you are unlikely to pay off your card each month, then finding one with a low purchase rate could be beneficial.
  • If you make lots of purchases overseas, you will want to know whether international transaction fees apply.
  • Often, cards with rewards programs have a higher annual fee – so if you are unlikely to find value in the rewards, you may prefer to forgo them for a lower annual fee.

To be eligible for a business credit card, you typically require 2 years of profitable trading financial history, but always check directly with your preferred provider. Business credit cards are just one option to consider when looking for financing tools and resources, so be sure to look into what will best suit your needs.

If you’d like to review and compare Bankwest’s range of business credit cards, click here.




1 CANSTAR database October 2015

The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. We recommend that you seek independent advice on taxation issues from your taxation advisor or accountant. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication.

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The Business of Business Credit Cards - Insights for Business - Bankwest
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