At some point after starting your business, you’ll likely apply for a business credit card. A business credit card simplifies your accounting process while helping you build business credit so that you can obtain business loans and secure better interest rates.
But you may hesitate to apply for a business credit card if you’re a sole proprietor. Will you even get approved?
By following the tips below, you’ll understand what you need to do to apply and how to increase your chances of getting approved for a business credit card.
Getting a small business credit card as a sole proprietor
If you have a sole proprietorship, your chances of being approved for a business credit card (and the interest rates you’ll pay if you carry a balance) are tied directly to your personal credit history. Your personal credit will affect the credit card’s initial credit limit and the interest rate.
Various credit cards will have different factors that impact your card membership eligibility. All businesses are different and have varying circumstances, so while your sole proprietorship may not qualify for one card, you may be eligible for another one.
Sole proprietors must use their business credit cards wisely
Many sole proprietors who apply for a business credit card will likely be approved. However, you must be vigilant about using the card responsibly. Having a credit card can lead to financial hardship and cash flow problems for your business if it’s not carefully managed.
According to the Small Business Administration, from a legal standpoint, there is no separation between you and the sole proprietorship you own and operate. You are responsible for the debts your business – i.e., you – incurs.
“A credit card is a tool that can be used correctly or incorrectly,” said LJ Suzuki, president of CFOshare. “Yes, you should get a business credit card because it is a good tool to have in your toolbox. But it is up to you to use that tool wisely.”
Using a business credit card wisely is crucial for sole proprietors. You are personally liable if you don’t pay your business credit card charges.
4 steps to improve your chances of being approved for a small business credit card
Many of the same rules that govern personal credit card approval apply to getting a business credit card.
“Getting a business credit card is just as easy or difficult as getting a personal credit card,” said Suzuki. “Generally speaking, it is still one of the easiest forms of credit to get – you can apply online for any variety of cards with different perks. But don’t be surprised if they ask for your Social Security number and run a credit check on you personally.”
Consider the following four steps to improve your chances of being approved for a business credit card.
1. Consider where you want to apply for your business credit card.
There are countless business credit card providers. When assessing the best option for your sole proprietorship, consider that these cards are backed by financial institutions, banks and credit unions – and they’re more inclined to approve businesses they already have a relationship with.
As a starting point, look at the banks you already have accounts with, either professionally or personally, and determine if they offer a business credit card. For example, consider the bank you use for your business checking account or the bank where you were approved for a small business loan. You may have a better chance of getting approved by reaching out to a bank that already knows your creditworthiness.
2. Check your credit score before applying for a business credit card.
As a sole proprietor, your personal financial situation matters more than it would for business owners in other business structures, like an LLC or S corporation. Card issuers will scrutinize your personal credit score.
Before applying for a business credit card, check your personal credit score. According to Experian, a good credit score is in the 700s. However, there is some flexibility here. For example, FICO considers scores starting at 670 to be good, while VantageScore considers anything above 660 to be good.
You can still get a business credit card if you have bad credit by applying for a secured card, where the credit card company requires a deposit upfront.
3. Ensure you have all relevant application information handy.
You’ll be asked to provide your Social Security number, recent financials to show monthly revenue and expenditures, and your company’s tax ID number (TIN).
While most other small businesses will be required to provide an employer identification number (EIN) as their TIN to apply for a business credit card, your status as a sole proprietor means you’ll use your Social Security number instead. (However, that rule changes once you have employees, as you’ll be required to have an EIN assigned to your business by the IRS.)
The card issuer will also want to know how long you’ve been in business. Banks and other financial institutions want to minimize their risk. Card issuers are more willing to work with a more established sole proprietorship than a new one.
The longer you’ve been in business, the more likely you will be approved for a business credit card. Longevity can also lower business insurance costs.
4. Decide what you can offer as a personal guarantee.
Since credit card issuers want to manage their risk with the borrowers they take on, sole proprietorships that offer a personal guarantee or collateral have a better chance of being approved. Collateral can be company equipment or real estate, or you can use a monetary guarantee as a down payment.
Benefits of credit cards for sole proprietors
Using a business credit card responsibly can improve your credit score and offer additional perks.
“Credit cards are an excellent form of debt to float temporary cash shortfalls or finance large online purchases such as furniture or software,” said Suzuki. “Credit cards are a terrible form of long-term financing. You would be better to get a working capital line of credit or term loan if you need debt for more than a few months.”
The following are some of the benefits a business credit card can offer your sole proprietorship:
- Business credit cards help build credit. The higher your personal credit score is, the more likely you’ll be approved for a business credit card. You’ll also receive more favorable interest rates and higher credit limits. Additionally, by using a business credit card and paying it back in full each month, you demonstrate to financial institutions that you are trustworthy and reliable.
- Business credit cards earn rewards. As an incentive for applying to certain business credit cards, card issuers offer excellent rewards, such as sign-on bonuses, travel miles, and cash back that you accrue as you use the card. Since you may spend thousands on purchases, these rewards can rack up quickly. Business owners can reinvest rewards, use them for business purchases, fund business travel, and more.
- Business credit cards simplify accounting. As a sole proprietor without a business credit card, you’ll likely use your business checking account and personal credit cards to pay bills. Mixing personal expenses and business expenses causes accounting confusion. With a business credit card, it’s much easier to corral your business charges in one place for reduced paperwork. In addition, business credit cards provide quarterly or year-end summaries, and some give you an online dashboard to help you track expenses.
- Business credit cards even out cash flow. Business credit cards can help with cash flow problems. When you can charge significant purchases to your business credit card, you can make those purchases when you need them, not just when you have that amount of extra cash on hand. This is especially beneficial for seasonal businesses that may need to invest before their busy season brings in the bulk of their revenue.
- Business credit cards offer benefits and protection. When switching from a business debit card or checking account to a business credit card for major purchases, you get better fraud protection and other benefits from your credit card company, including free additional purchase protection or travel insurance.
After using your business credit card wisely, you’ll improve your business credit score, demonstrating how financially sound and reliable your company is.
Popular credit card options
While it’s impossible to list every potential credit card option available to sole proprietors, here are a few. Benefits vary by card issuer, so consider rewards, interest rates and fees.
- Visa small business credit cards: Visa is a credit card brand marketed through different financial institutions, each with different interest rates, terms and benefits. It’s the most widely accepted credit card type. You’ll have to go through a financial institution to get one. Visit Visa online to learn more.
- Mastercard small business credit cards: Mastercard is also a credit card brand distributed through financial institutions. While it’s widely accepted, it’s not quite as ubiquitous as Visa. Visit Mastercard online to learn more.
- American Express business credit cards: American Express is a higher-end card that entails annual fees. American Express has excellent support and benefits but is not as widely accepted because it charges merchants higher fees than other card brands. Visit American Express online to learn more.
- Capital One business credit cards: Capital One is a financial institution with a variety of Visa and Mastercard accounts. Visit Capital One online to learn more.
- Citi business credit cards: Citibank is another financial institution with various Visa and Mastercard accounts. Visit Citi online to learn more.
Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.