Ramp explains what startup owners need to know before applying for a business credit card.
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Business credit cards are an essential tool for many startups and small businesses. After all, it takes money to make money, and credit cards provide the capital entrepreneurs need to build their businesses. But that's not the only benefit of having one of these cards in your wallet.
The best business credit cards for startups don't just give you access to capital; they provide effective tools and integrations for better accounting and money management, saving you precious overhead dollars. They also help you manage cash burn, giving you a longer runway with the money you have access to. Not to mention, these cards give you access to rewards and perks that may have a real impact on your bottom line, especially as you build your budding company.
There are several things you should know before you apply for a business credit card. In this article, Ramp shares everything you need to know.
Many startups, LLCs, and sole proprietors can qualify for a business credit card. If your business doesn't have an established credit history, you can apply using your personal credit score.
If you don't have any credit, or your credit score isn't very good, a secured business credit card is an option that doesn't require any credit history and can help you build positive credit. This is because with secured cards, you'll make a deposit that becomes your credit line. Once you've built your credit using a secured card, you may become eligible for a traditional credit card.
Corporate cards offer another option for startup businesses. Instead of looking at your business credit history, some cards will underwrite based on your monthly sales data. So, if your business is bringing in enough monthly revenue, you may be eligible for a card even if you don't meet the requirements for a traditional credit card.
If your business lacks an established credit history, secured credit cards are the most accessible option for getting a business credit card. Unlike traditional credit cards, which often have stringent credit score and revenue requirements, secured cards are more lenient. This is because you provide an upfront cash deposit that serves as your credit limit. For businesses with less-than-stellar credit scores, secured credit cards offer an alternative way to build business credit.
It's important to choose a credit card issuer that offers you all the tools you need for success. Consider the tips below as you decide which business credit card is best for your startup.
1. Know the eligibility requirements
Each unique business credit card comes with its own eligibility requirements. To qualify for most offers, you typically need at least the following:
If you don't meet the requirements above, don't worry—you're not out of luck. Some corporate cards can use your sales data instead of years of business credit history or a personal guarantee to underwrite your business.
Can I get a business credit card with no business income?
Although some credit card providers will look at your business income, you can still get a business credit card if you use a personal guarantee. That way, you'll agree to repay any debts your business can't pay back from your own pocket.
2. Look for rewards that help your startup
Rewards have become commonplace in the credit card industry. Rather than looking at membership rewards and additional perks as extras, consider them as essential tools to help you grow your company.
Most cards only offer rewards or bonus points on eligible purchases in certain spending categories like office supplies, travel expenses, or dining. What you can redeem your rewards for also varies by card, so you'll want to consider whether you want travel rewards or more general rewards.
To avoid the complexity of trying to spend within the right bonus categories, you might consider looking for a card that offers universal cashback rewards on all purchases. That way, you don't have to tailor where you spend your money, and you'll know the value of the rewards every time you make a purchase. Cashback is often applied as a statement credit that you can put right back into funding your business.
3. Evaluate potential fees and interest
It's important to look for an option that comes with a low interest rate if you're not able to completely pay off your balance each billing cycle. Some cards also come with a 0% introductory APR period at account opening that you can use to perform balance transfers and pay down your debts on other cards.
However, interest often isn't the only fee you'll pay as a cardholder. Some other fees to watch for include:
Make sure you're aware of any fees you may be required to pay before you fill out any business credit card application. Or, you can avoid those fees by taking advantage of corporate purchase cards. These are charge cards, alleviating interest fees.
4. Compare terms and conditions
Different terms apply to each card, so you'll want to familiarize yourself with your provider's unique terms and conditions.
For example, some credit cards automatically revert to a default interest rate if you make a single late payment. In other cases, you won't experience a default rate unless you completely miss a payment or make multiple late payments over a predetermined period of time.
Moreover, as the business owner, you may be personally liable if your business is unable to make payments, which could lead to collection actions, poor credit, and even bankruptcy.
5. Look for spend management features
Quality spend management is essential for every business, but it can mean the difference between growth and bankruptcy for startups. The best cards for startups come with spend management software. Some features to look for include:
So, you're ready to get a business credit card, but what are the steps to doing so? Read on to learn everything you need to know.
1. Building credit history
If your business isn't at least three years old, you'll likely need to rely on your personal credit for access to a business credit card. Even if your business is over three years old, if it doesn't have any credit history, you'll need to rely on your personal credit score.
As such, it's important to work on your credit history and improve your score. You can do so by opening and using a secured credit card, a credit card that requires you to make a security deposit that becomes your credit limit. The good news is that once you do get a business credit card using your personal credit, you'll start building your business's credit score. And as long as you use your credit card responsibly, your business will qualify for a credit card on its own in time.
2. Required documents
Once you find an offer that meets your business needs, it's time to submit an application. In most cases, you'll be required to submit a series of documents for review by the lender's underwriters. These documents typically include:
3. Wait for approval
Several factors play a role in the amount of time you may have to wait for approval. In some cases, you'll receive an instant decision in a matter of seconds. If the lender needs more information or further review, the process may take anywhere from a couple of days to a few weeks.
The average business credit card limit in the United States is $56,100, but your limit may differ significantly from national averages. That's because a lot of data goes into calculating the credit limit your business qualifies for. Some key factors involved in the calculation include:
There are a few things you can do to improve your chances of approval for a business credit card and higher credit limits. Those include:
Here's a general list of items you can (and should) use your business credit card to pay for:
The list above includes things that most businesses rely on business credit cards to pay for. However, it's not an exhaustive list. The items listed below can also be paid for using a business credit card, but be careful not to do so if you can't pay the balance. Otherwise, you might find yourself having to pay interest on the following:
Before you start using your business credit card, take some time to project out your business expenses over the next few months and ensure that you're not overextending your resources.
This story was produced by Ramp and reviewed and distributed by Stacker Media.