Do i need a business credit card if i’m self-employed?
Businesses, regardless of their size, need capital to function properly. A business credit card can be a solution.
You don’t necessarily need a business credit card when you’re self-employed. But a card can be useful for managing your day-to-day business expenses or financing larger expenses so you can grow.
Business Credit Cards Can Simplify Self-Employed Taxes and Accounting
A business credit card can benefit the self-employed in more ways than one, including freelancers, independent contractors, and sole proprietors. The first concerns organization and record keeping.
“For the self-employed, it often happens that their personal and professional lives become one,” says Jay Singer, senior vice president, global small and medium businesses at Mastercard. “Having separate financial accounts helps. to keep these flows organized and the accounting records up to date. “
This is especially important at tax time. In a QuickBooks 2018 Survey of freelancers, one of the biggest challenges reported was keeping an eye on business-related documents. Business credit cards are extremely important for budgeting and tax reporting, says Alex Shvarts, chief technology officer for small business financing platform FundKite.
“Those who are self-employed need to know the difference between what they spent on gasoline on travel and what they spent on personal groceries,” he says. “This makes it much easier to itemize deductions during tax season to reduce your taxable income.”
Rewards can offer savings for solopreneurs
Kevin Ha, entrepreneur and blogger at personal finance site Financial Panther, says he uses business credit cards for record keeping, but is more interested in another perk of the card: earning rewards.
“Business credit cards are one of the best ways to rack up a ton of points,” Ha says, “especially if you have a business that spends a decent amount of money.”
In one year, Ha opened nine business credit cards, accumulating over a million points and miles. He uses these rewards to save money on business trips and hotel stays.
Business credit cards can also come with additional services, protections and benefits that can make running a business easier, such as:
Business credit cards can smooth cash flow and create credit
Self-employment does not always guarantee a stable salary or that you will be paid on time. A 2018 investigation of Bonsai, a contracting and invoicing platform for freelancers, found that 29% of freelance invoices are paid late. Having to play the waiting game could make it harder to run your business.
“If a freelancer doesn’t have the cash on hand, it blocks operations,” says Shvarts. “Using a credit card until they get paid frees up cash and keeps their jobs running. “
Shvarts says business credit cards may offer better terms than personal credit cards, including higher credit limits and the ability to extend your billing cycle. “A card can allow cardholders to keep a balance for up to 60 days without interest or offer a discount if they pay early,” he says.
Beyond cash flow management, a business credit card is also a way to establish and develop business credit.
Why is this important? At some point, you may decide to expand your business. If you don’t have cash on hand, you may consider requesting a Commercial loan. A good business credit score can improve your chances of getting approved.
Self-employed people can build a good business credit score by using their business credit card responsibly. Including:
- Pay credit card bills on time every month
- Maintain a low credit usage rate on business credit cards or pay off the balance in full each month, if possible
- Keep old business credit card accounts open even if you don’t use them regularly, as this can benefit your overall credit age
- Space out requests for new credit card accounts to minimize any negative impact on the credit score of difficult investigations
Do Business Credit Cards Have Downsides When You Are Self Employed?
The answer to this question largely depends on how many cards you have and how you use them.
For Ha, the biggest downside to having multiple business credit cards is simply keeping track of the different balances, rewards, and payment due dates. Setting up email or text alerts to monitor new purchases, card balances, and due dates can be a simple workaround.
Having too many cards can still work against you if it negatively impacts your business credit score or if lenders perceive you to have cash flow problems, Shvarts says. “Keeping the number of cards to a minimum is best and helps you remember expiration dates. “
Self-employed people also need to consider how a business credit score might affect their personal credit and finances. Applying for a business credit card can affect your personal score if the card issuer uses your Social Security number to check your credit.
Once the business credit card is opened, account activity is reported on your business credit report. Depending on the issuer, account activity may be reported on your personal credit report. Some issuers’ business credit cards will only appear on your personal credit history if you are past due, which could affect your personal credit rating.
Late payments may also result in a penalty annual percentage rate. If you typically keep a month-to-month balance on your business credit card, a higher penalty rate could make it more expensive.
Beyond that, business credit cards often require a personal guarantee. A personal guarantee means that you personally agree to pay off your business credit card debt. If you default on the card, the credit card company may sue you personally to collect the outstanding balance.
Choosing and applying for a business credit card when you are self-employed
Applying for a business credit card when you are self-employed is not that different from applying for a personal credit card. You will just need to give the credit card company all the necessary information, such as:
- Your name and role in the business (founder, owner, etc.)
- The name and structure of your business (sole proprietorship, LLC, etc.)
- Your social security number or employer identification number
- Phone number, address and e-mail
- Years of activity
- Annual sales
- Annual personal income
- Monthly rent payment
- Rent or own status
You may also be asked how much you plan to spend with the card each month or if you have employees.
Remember, you don’t necessarily need a long period of business or a significant annual income to get approved for a business credit card. By using your personal credit, you can qualify for a business credit card when you are self-employed, even if you are running a small independent business or a startup.
When it comes to choosing a card, look for one that matches the way you spend money on your business and offers repayment terms that are right for your cash flow. If you want to earn rewards, Ha suggests carefully comparing introductory bonus offers and current rewards.
“Look for cards that offer bonuses in the categories you spend in,” Ha says. For example, his business spends a lot on advertising, so he uses a card that offers three points per dollar on advertising purchases. And consider using cards that earn high rates across different expense categories to maximize rewards earnings.
Shvarts cautions independent business owners to read the terms carefully to make sure they understand what they are signing up for. If the card waives the annual fee for the first year, for example, you’d want to be sure that the rewards and other perks are worth paying the fees once they go into effect.
And most importantly, use the map to manage and grow your business wisely.
“Don’t buy more than you can afford,” says Shvarts. It may be necessary to go into debt to increase or cover short-term expenses, but “remember to be smart about your spending.”