post by:
Michael Goldstein
The second you decide to apply for a credit card, you will be inundated with offers from every financial institution that uses media marketing – social media ads and commercials galore. You will have so many options that it can be hard to differentiate which credit card is right for your eCommerce business. While researching, consider these 6 steps to narrow down the options when applying for your eCommerce credit card:
- Evaluate Your Needs
- Consider Your Credit Score
- Research Interest Rates And Apr
- Review Additional Fees
- Estimate Personal Risk
- Pick Your Bonus Features
We will go in depth with each of these steps below. Together we will find the best credit card to benefit your eCommerce business.
1. Evaluate Your Needs
Every major bank and financial institution has a business credit card to meet the general needs of the businesses they serve. However, as an eCommerce business, your supply chain and business model may be different from a brick and mortar store and, therefore, have specific needs that may not be met by the overarching “business credit card”.
When looking for a credit card, your business needs are based on:
- Stage of growth
- Your business goals
- Cash flow
Stage of growth – Startups and new small businesses have different needs from a credit card than an established or larger business. A startup and small business will need to work on establishing their presence in the eCommerce world with marketing, advertising, and working out kinks in a new supply chain – such as obtaining new inventory and meeting customer demand. Larger companies may be looking to branch out to new locations to serve and larger distribution centers.
Regardless, your stage of growth may mean you can receive a higher credit limit amount. But don’t let this deter you if you are still a small growing business – credit limits can be increased as you build your credit score.
Your business goals – Part of your business goals include some of the examples we mentioned in “Stage of Growth”, but goals can be more than acquiring inventory or distribution centers. Your business goals determine how you will spend the credit lended to you.
Understanding your business goals allows you to make a plan to ensure you won’t overspend or use your credit card for frivolous purchases.
Cash flow – Cash flow is the transaction of money coming into and moving out of your business. Applying for a credit card helps improve your cash flow, giving you access to capital to help your business feel less of a constraint when making vital purchases. Of course you will have to pay off the purchases made on credit, and if you don’t pay off your balance each month it will incur interest which will decrease your cash flow.
It is important to ensure you are evaluating your individual credit needs before choosing a lender, accepting a credit limit, and agreeing to terms.
2. Consider Your Credit Score
Any time you apply for credit, there is a chance the lender is going to check your credit score. Your business credit score is based on a scale of 0-100. 75 is generally considered a “good” or creditworthy score.
Businesses with little to no credit history may find that their credit scores are lower than the minimum requirements for major business credit cards. Credit card companies may look at your total credit report which includes all of your current debts, paid balances, credit limits, and invoices.
If you do not have business credit history, you can supplement with your personal credit score. Generally to receive approval for a credit card, your personal credit score should be 700 or higher.
There are many credit card companies that will aid you in building credit and improving your credit score. These credit cards are meant to be used short term because they tend to have lower credit limits and higher interest rates. However, these are a great jumping off point for many new business people who do not have significant credit history to rely on.
Building credit is an up-and-down process. If you have good credit, you may not need to “build” your credit before getting a business credit card. At this point you have already proven to most creditors that you pay back your debts.
That being said, you can improve both your business and personal credit score by paying off outstanding debts and invoices. You can also consolidate debt into a low interest loan to reduce the amount of money you pay in interest, hopefully allowing you to pay back the debt faster.
3. Research Interest Rates and APR
Lending money isn’t free, so expect to pay interest on any loans and lines of credit – including credit cards. The interest is the percentage of the principal that you pay to borrow the money.
Companies that have lower interest rates, may have higher APRs to make up for the difference they would have received in higher interest. Make sure to carefully review interest and APR rates to determine if those payback rates work for you.
Credit card interest rates are determined by the information you provide on your application and your most recent credit report. Your application will ask you to provide:
- Your business name
- Headquarters location
- Time in business
- Annual revenue
- Any outstanding debt
- Name, date of birth, and social security number for the primary cardholder and any names and dates of birth for authorized users (if applicable)
Possible questions:
- Number of employees
- Industry of your business
With this information, the credit card company or bank will be able to pull your business and personal credit histories to determine your eligibility for the lowest interest rate possible.
Although, arguably more importantly, you need to review the APR. Annual Percentage Rate (APR) is the rate that includes the amount of interest and annual fees for one year. While you are paying x% every month, you may be able to decrease your APR by paying off your balance earlier than the due date.
Let’s say you take out a $10,000 loan with 10% interest rate and you decide to pay it off in 10 months at $1000/month. At the end of Month 10, you still owe money, even though you’ve paid back $10,000 because of the interest that accrued, and compounded monthly, throughout the time you had an outstanding balance.
Your APR, however, is the percent you’ve paid over the total charges to the card for one 12-month period. So if you pay off some of your purchases early – say in 5 months instead of 10 – your APR will actually be lower because you did not pay for the additional 5 months of interest.
4. Review Additional Fees
It is not uncommon for certain credit cards to have additional fees, including, but not limited to:
- Late fees
- Annual fees
- Processing fees
- Balance transfers
- Foreign transaction
- Cash advance or cash withdrawal
You can avoid some of these by simply not participating in balance transfers or foreign transactions, paying your bill on time, and choosing a credit card that does not have annual fees.
However, you may find that some of these fees are unavoidable. There are merchants who do not cover the processing fees (usually between 1.5-3% of the total purchase) for their credit card paying clients, adding that amount to your purchase. Additionally, many businesses seek out credit cards specifically for debt consolidation or the ability to make purchases overseas.
Late payments happen on occasion, and that is why you need to review the credit card company’s grace periods and late payment fees. A grace period is the number of days after a payment is due that you can still make your payment without incurring any penalties. Grace periods are usually 3 days long to cover any payments that fall on a weekend or bank holiday. But if you miss the grace period, the credit card company will charge you a late fee, which will be added to your balance. If you do not pay off the balance, that late fee will start to accrue interest along with the rest of your purchases.
You need to pay attention to these fees because they are charged per each transaction or transfer. As with processing fees, these amounts could be expressed as a percentage, meaning the more you spend, the higher the fee.
Credit cards that use flat fees instead of percentages can be easier to budget and are less expensive if you are using these services for large purchases.
5. Estimate Personal Risk
As we mentioned previously, you may need to use your personal credit to acquire a business credit card if your company does not have adequate credit history. When a creditor pulls your credit report it counts as a “hit” and can impact your credit score. Multiple hits will cause your credit score to decrease, making it more difficult to obtain personal credit in the near future.
Keeping your personal assets safe should always be a priority when researching credit and lending options. Business credit cards use 2 types of loans:
- Secured loans
- Unsecured loans
Secured credit cards are the lines of credit that require the business to put up collateral. The collateral is a business (or personal) asset, valued at the same dollar amount that you owe on your credit card. These assets could be your inventory, machinery, vehicles, or real estate owned by your company.
Some small and medium-sized businesses use their personal vehicle for work so they decide to make it “company vehicle.” In doing so, they have made that vehicle a business asset which can be seized for non-payment under the business.
You need to be careful what you use as collateral when you are approved for a secured credit card. If your business does not have sufficient collateral, you may be asked to put up personal assets to supplement the difference. This is where things get tricky, because if you do not make your payments, you could risk losing your home, car, or bank accounts.
Unsecured credit cards on the other hand, do not require collateral or personal guarantee. If you do not pay, the credit card company will not take business or personal assets. They will, however, send your account to collections and you are still held responsible for your debt.
Ultimately, you should avoid late payment and non-payment when you are taking out any kind of credit. But arming yourself with these significant differences allows you to prepare for “worst case” scenarios.
6. Pick Your Bonus Features
Bonus features and perks are what credit card companies advertise upfront, and what probably drew you to that specific card in the first place. Ultimately, you should use the bonuses as a tiebreaker at the end of your research rather than at the beginning.
Many of these perks are opening offers for new customers that only last for the first 6-12 months. If you are looking for a long-term credit card, or you plan to make purchases that will take longer than 12 months to pay off, treat bonus features like the sprinkles on a cupcake – they do not add any flavor but they are a bonus.
Business credit card bonus features can include:
- X months with 0% interest
- Cash back
- Airline miles
- Points
- Spend $X in (time frame) and get bonus points/miles
Credit cards that offer “X months with 0% interest” are offering you a limited period of time from when you are approved to make purchases without accruing interest. When the Time period runs out, interest will be applied to your balance, compounding each month. Some people like to call this offer the “ol’ bait and switch” because it lures you in with 0% interest, allowing you to make guilt-free purchases, but at the end of the period, the interest rate is incredibly high. With these types of promotions, you need to verify what your interest rate will be before you accept the card. This way you can fully understand and agree to the terms ahead of time.
Cash back is a popular promotion where the credit card company pays you for using their service. The amount you receive will vary between credit card companies, but generally cash back rewards are between 1-3% of the total purchase. These dividends are paid out monthly and are applied toward your credit card bill. Keep in mind, cash back is based on your purchases, not your credit card balance. The balance will still accrue interest.
Airline miles rewards are attractive offers for business people who travel frequently. Every dollar you spend will give you “miles” which can be redeemed for an airline ticket. The amount of points you must accrue to redeem your ticket varies based on the location and airline you are traveling with. For example, if you are using a Hawaiian Airlines Business Credit Card, you can only redeem the miles through Hawaiian Airlines – American Airlines Credit Card is only redeemable through American Airlines, etc. Hawaiian may only require 80,000 miles to redeem a ticket from your location but American Airlines may require 50,000 for a trip to another location. If you do not like airline travel, this perk may not be for you.
Points, like Airline miles, accumulate based on the dollar amount of your purchases. Tiered point systems are in place so that you can reach certain levels to redeem your points for discounts, products, or cash applied to your statement balance. If the credit card company has a catalog of their rewards, browse through it to see if there is anything of interest to you or that could benefit your business. If there is nothing of interest or benefit, you can find other credit cards with other offers.
Promotions such as “Spend $X in (time frame) and get bonus miles/points” (example: Spend $10,000 in the first 3 months and get 50,000 bonus points/miles) are designed to entice you into spending more money within the first few months. It’s the miles/point system with an extra added bonus to sweeten the deal. For every purchase you make, you accumulate points or miles toward a reward or airline ticket.
Summary
- Put your business needs first so you can determine the amount of credit you need to draw from and what you plan to use the credit toward.
- Be aware of your credit score and order your credit report to see where you can improve your credit. There are many options open to businesses that need to build credit.
- Research and compare interest rates and APRs among various credit cards to ensure you are paying a fair and reasonable amount. Interest adds to your balance, then compounds interest on top unpaid balances, including previous interest charges.
- Be aware of any additional fees associated with the credit card you choose, especially if you are looking to use the credit card for a specific feature (foreign purchases, cash advance)
- Determine if personal assets or personal credit will be affected or at risk after approval of a business credit card.
- Find bonus features and perks that work for you and benefit your business.