What You Should Know Before You Use a Credit Card to Fund Your Startup Business
A credit card is a popular tool for financing a startup business. According to the U.S. Small Business Administration, Office of Advocacy, a credit card is a top source of capital for startups. This is why it’s important to understand how to get credit approval and use a credit card the right way. Currently, a credit card may be the only option you have for funding your startup business. Educating yourself on credit approval and the proper use of a credit card can help you get the most out of using it to fund your business. In this blog, I focus on educating you on those two things– credit approval and credit card usage.
Credit approval is all about understanding what credit score (and history) you should have to get approved for a credit card. Using the credit card right is all about knowing how to get the biggest benefits for your startup business as a result of using the card. By the end of this blog you should have a better understanding of how to get approved for a credit card (to finance your startup business) and how to use it to get the biggest benefits for your business.
The Best Credit Card for a Startup Business
Before you apply for a credit card, you should also know what type of card works best for a startup business. At LenCred, we recommend that you separate your personal credit from your business credit. Most people don’t do this and end up using personal credit cards to fund a business. The major problem with that is it can impact your personal credit history. For example, if you have maxed out your personal card from paying for business expenses, it can cause a decrease in your credit score. This is why we tell our clients to avoid using personal cards to fund business expenses. If you use a business credit card instead of a personal credit card, your personal credit history may not be heavily affected.
Find Out if You Qualify for a Business Credit Card
Your personal credit score and credit history is the key to getting approved for a business credit card. Most credit card issuers (e.g. banks) will check your FICO score to determine if you qualify. So the first step you should take before applying for a business credit card is pulling your credit report. There are many sites online where you can get a copy of your credit report. But, I suggest you use www.MyFICO.com to get a copy of your credit report. This website is owned and operated by the Fair Isaac Corporation. The company who created the FICO credit score model. 90% of traditional banks use the FICO credit scoring model to determine the credit worthiness of borrowers. So you will get the most accurate credit score from their website. Knowing your credit score and credit history will help you determine if you qualify for a credit card (before you actually apply).
What a Credit Card Issuer Looks for On Your Credit Report
When a credit card issuer pulls your credit report, they look for certain things to determine your credit worthiness. When applying for a business credit card, they look at how well you manage your personal credit cards. It’s important that you have a personal credit card in your name (for at least 4 years) before you apply for a business credit card. Personal credit card usage gives banks a good idea of how you manage revolving debt. Banks also pay attention to other important factors such as the amount of credit card debt you have. They also look at the credit limit on each personal credit card in your name. For example, if your personal cards are over 30% utilized, you will get denied for “over-utilization.” When you use more than 30% of your total available credit limit, banks see this as being “maxed out.” Based on research conducted (in 2016) by the LenCred team, your application for a business credit card could be denied for the following reasons:
- More than 2 unpaid collections/public records
- More than 4 late payments in the last 24 months
- Less than a 4 year age of file
- Less than 5k in available credit limits
- Less than 3k on a single revolving account
- Less than 1 revolving credit account
- More than 7 inquiries on any one bureau in the last 6 months
- More than 10 combined inquiries on any Transunion and Experian
Why a Credit Card Issuer Checks Your Personal Credit
Credit card issuers check your personal credit history to determine your credit worthiness. Also, you’re required to provide a personal guarantee for a card, if it’s unsecured. (For the sake of this blog, I am focusing on unsecured business credit cards). The credit cardholder (i.e. you) is responsible for personally guaranteeing that all funds used will be paid back on time. Unsecured cards don’t require collateral for approval. So banks need another way to feel secure in approving you for a card. They can only do that by checking your personal credit report. (This is especially true for startup businesses with no track record).
Your personal credit history gives banks a good idea of what type of credit cardholder you will be. They want to verify that you don’t have a ton of credit card debt (that you can’t pay back). They also want to be sure you haven’t reached the credit limit on your personal credit cards. Additionally, the want to be sure you make timely payments on a consistent basis. Your personal credit report provides credit card issuers with the insight they need to make a decision.
How to Use a Business Credit Card to Preserve Your Personal Credit History
The best way to preserve your personal credit rating is to make timely payments toward your card bill. This requires keeping up with your billing cycle so you’ll know when the payment is due. You also have to stay on top of your credit card balance so you’ll always know the minimum payment amount required for each billing cycle. The minimum payment amount can vary for each billing cycle, so it’s critical to check your credit card balance several times per month. You also need to watch the credit card balance to be sure you don’t go over the “30% utilized threshold.”
Some cards report to your personal credit and others do not. For those that do, you’ll want to keep the balances low so your credit rating doesn’t drop. (I suggest you avoid applying for a card with credit card issuers that report usage to your personal credit profile). Stick with the credit card issuers who report to business credit reporting agencies like Experian Business or Equifax Commercial. This will help you preserve your personal credit and build business credit. If you’re not sure which credit card issuers to apply to, the LenCred team can help. Contact the team for more information on how to get unsecured cards for your startup business.
How to Get the Most Out of Using a Business Credit Card
When you use your card to pay for business expenses, you can usually write these things off on your taxes. Being able to write things off on your taxes can always help you save money. However, there are also other ways to get the most out of using a card to fund your startup business. For example, many cards come with a cash back reward program. Every time you make a purchase (at a certain location), some of that money is credited back to your account as a cash back reward. This is often called a statement credit. If utilized properly, the reward program can help you save money by reducing the amount of money you have borrowed.
The cash back reward program can vary depending on the credit card company. For example, some credit card companies will deposit the cash back reward into your bank account instead of giving you a statement credit. It’s best to find out how each credit card company handles their reward program to determine if it will meet your needs.
Check the Fees Associated with Using the Business Credit Card
All cards have fees attached to them. I suggest you go with the card offer that has the lowest fees. Before submitting a business credit card application to a credit card company, ask the right questions. Find out if the card has an annual fee, a finance charge for cash advances as well as the annual percentage rate (APR). All these things affect how much you will towards your credit card balance (on an annual or monthly basis).
Get Help Choosing the Right Business Credit Card
Navigating different credit card issuers to find the best business credit card can be daunting. That’s why LenCred exists. LenCred advisors are experts in helping startup business owners get unsecured business credit cards with the lowest fees and biggest benefits. To learn more about how to get the best business credit cards, contact the LenCred team for help. You may be able to get up to $50,000 or more in unsecured business credit cards for your startup business in the next 90 days or less.