Business credit can open doors to financing, better vendor terms, and valuable partnerships. But how can you build it? If you have a legally registered business, an EIN, and a business bank account, you’re ready to get started. From there, you need to establish your first tradeline, a record on your business credit report that shows whether you’re making monthly payments on time. While there are a few ways to do that, charge cards offer a great entry point.
What are business charge cards?
A business charge card is a card that allows for the short-term financing of business purchases. You use it to make purchases throughout a billing cycle, and then pay off the full balance when you receive the statement each month. If you miss a payment or don’t pay off the full amount, you can face late fees or lose access to the card. Also, the lender may report to a credit bureau that you failed to pay the credit balance timely.
Unlike traditional credit cards, charge cards don’t accrue interest. You simply pay off the amount you spend each month. They typically don’t have a fixed credit limit. Instead, the limit may be dynamic and adjust over time based on factors like your payment history, spending patterns, and credit profile. As for the costs, charge cards may come with an annual fee you have to pay each year to keep the card active.
Key benefits of business charge cards
Business charge cards offer various notable benefits, including:
- No deposit requirement: You don’t have to put down any money upfront to get access to a charge card.
- No interest charges: Since you pay off the balance in full each month, interest does not accrue on the amounts you charge.
- Builds credit history: If the card provider reports to one or more business credit bureaus, the card can help you establish a credit file and, if you make your payments on time, help you build a positive business tradeline.
- No credit utilization impact: You don’t have to worry about a high credit utilization ratio hurting your credit scores, since you are not carrying over a balance each month.
- Rewards: Some charge cards let you earn points, cash back, or other perks on your business spending.
- Benefits: Cards may also offer extra features like fraud protection, virtual card numbers, and employee cards with customized spending limits.
While charge cards don’t let you carry a balance beyond a month and may come with annual fees, they offer a deposit-free way to start building business credit without worrying about interest charges.
Charge card best practices for building business credit
If you decide to move forward with a charge card, here are a few tips to help you use it to build business credit effectively:
- Ensure the card will be reported to the business credit bureaus: Choose a charge card provider that reports to one or more of the business credit bureaus: Experian, Equifax, and Dun & Bradstreet (D&B). This is required for the card to have an impact on your business credit.
- Look for a competitive card: Look for cards with competitive fees and perks. You might as well get all the rewards and benefits you can while using the card for your business expenses.
- Use the card each month: Use the card to pay for business expenses each month to demonstrate your ability to repay credit on an ongoing basis. Your spending patterns will be a factor in your future spending limit.
- Make on-time payments every month: Never miss a payment. On-time payments will help to build your business credit, while late or missed payments will work against you. Consider setting up automatic payments or reminders to reduce the risk of missing your monthly payment due date.
- Monitor your business credit reports: Check your business credit reports regularly to make sure your charge card is being reported accurately.
- Maintain good personal credit: If the card requires a personal guarantee, keep your personal credit in good shape. It may impact your spending limit going forward.
By following these steps, you can establish business credit while making the most out of a business charge card. Over time, that foundation can help you gain access to larger financing opportunities, such as business term loans, commercial auto loans, and extended supplier payment terms. Further, as your credit profile strengthens, you may qualify for funding without a personal guarantee—helping to further separate your business and personal finances.
Lili has something exciting around the corner for small business owners that may help you build your business credit. Stay tuned for an exciting update!
