The Important Facts About Applications For Business Credit Cards
The new laws that restrict predatory practices do not extend to those making applications for business credit cards. Important points to keep in mind are that most small business credit accounts are paid monthly rather than carrying a balance from month to month.
Bank of America announced it would extend the same protections to business credit cards as it was required to provide to personal accounts. Other large credit issuers may do the same.
Small business credit cards usually have significantly higher credit lines than consumer credit accounts. The amounts charged on those cards may be for seasonal goods with large purchases quarterly or semi-annually. This adds a level of difficulty for lenders when they try to asses the credit worthiness of the business.
Credit Rating of Your Business is Crucial
What is important to keep in mind when making application for a business credit card is that the approval of a credit line is dependent on the credit rating of the business itself. If you are starting a new business you may be able to apply for and receive credit if you can show substantial financial resources available to run the business or if your business owns a physical building or special equipment used in manufacturing or supplying your products.
If your new business has not yet established credit in its business name, you may be required to sign a personal liability pledge that uses your personal credit rating to obtain a business credit card.
Clearly, this is not the ideal situation considering the risky economic times and the failure rate of new small businesses. If this is the only option available to you, ask the lender if the credit account can be transferred to your business in the future after credit is better established. If this is possible, it allows you to remove your personal financial assets at some date after applications for a business credit card.
With business credit cards, a determination of credit worthiness is not simple. If a much higher amount is charged during a specific month it may be due to seasonal stocking requirements or a new advertising campaign. Business accounts fluctuate widely and thus it may take longer to establish a high credit rating for a business than for personal use.
Where To Apply?
Application for business credit cards can be made through major credit issuing banks. An important fact to keep in mind is that a few smaller banks specialize in issuing credit accounts targeted only to small businesses. The qualifying requirements may be somewhat more flexible if you make application through such a lender, but the danger of predatory practices may also be increased.
In the credit positioning that has taken place in the past two years, banks have raised credit limits and lowered credit lines on consumer accounts. This practice extended to some lenders who dealt only with applications for business credit cards.
The Credit Crunch
When the credit crunch came, some of the specialist banks were seized by the FDIC. One such bank was Advanta. Credit lines were shut down and many of the credit card accounts owed were sold to third-party debt collectors while some business account holders found their payments were now due to the FDIC.
This was not a small lender as Advanta bank issued 20% of small business credit cards applied for in 2007. For business credit account holders who used their credit cards as financial management tools and paid off balances monthly, the closure was an inconvenience. For those who carried balances or who had borrowed against their business credit lines, the bank takeover was disruptive. The bank held 1.3 million accounts and had $14 billion in payments annually according to the Nilson Report.
This lender had become well known as one with predatory lending practices where APR was raised without reason and teaser rates were abused. When Advanta was closed, the small business owners had to scramble to open new credit card accounts quickly to avoid disruption of their business finances.
Summary
When you make applications for business credit cards, it is important to keep in mind the previous credit established by your business, your willingness to guarantee an account with your personal credit and the reputation and solvency of the credit lender you apply to.
