Business credit cards or consumer credit cards: Which is right for your small business?

Dear Your Business Credit,
I’ve heard that my small business credit card does not offer the same protections as my personal card. Why is that, and does it mean I should switch to my personal card instead?  — Confused

Dear Confused,
Your question is a smart one to be asking these days. In the wake of the credit crunch, many businesses still can’t get small business loans and must rely on credit cards to deal with cash-flow crunches and financing needs. That means the cards you choose will have a bigger impact on your business than if you were able to spread your loans among several types of lenders.

In a 2010 report, the Federal Reserve Board noted that small business credit cards bring certain advantages over personal ones used for business: They often have higher spending limits and offer options such as adding employee cards with preset spending limits. The report found that in 2003, average interest rates on small business cards were lower than on personal cards used for business. The data also indicate that the minimum APR for new purchases tends to be slightly lower for business cards than for personal cards.

Using small business credit cards can minimize paperwork hassles, too. They typically offer convenient features, like detailed monthly and quarterly expense tracking and annual spending reports you can download into your accounting software, notes David Sussman, CEO of Valcor, a small business advocacy firm. Maintaining a separate business card can also help you avoid confusion at tax time about which expenses are for business and which are personal. “At the end of the year, are you going to go through all of your receipts?” he asks.

Setting aside a personal card for business might also help you to avoid confusion. However, experts say that if you’ve formed an limited liability company or LLC, keeping your business expenses separate from your personal ones can help you to keep your personal assets — such as your house — protected if you are ever sued. Having a credit card with your business’s name on it provides proof that you operate the company separately from your individual finances.

What’s more, a business credit card will help you build a separate credit history for your business.

Given all of these advantages, nearly two in three small companies opted for business credit cards in 2009, when the Fed did its research. About four in 10 (41 percent) used personal cards for business expenses.

That said, there are serious downsides to consider. Small business credit cards typically require a personal guarantee — meaning that if you’re running up substantial charges for your business and can’t pay them, you’re responsible. “A lot of people think, ‘If I get a card in my business’s name, it’s separated from me,'” says Sussman. Not so. “If you don’t pay the bill, they will come after you personally.” And there’s no easy out. Under the Dodd-Frank Act, it’s tougher to file for personal bankruptcy protection, he notes.

At the same time, you don’t get as many protections under the Truth in Lending Act as you would with a consumer card. The law requires consumer card issuers to make detailed disclosures that help you compare the cost of using them. The main protection business card holders get under the law, through 1974 amendments, is from being subject to more than $50 in unauthorized charges.

Nonethless, many small business card issuers voluntarily disclose details such as annual percentage rates, finance charges and penalties, using the same type of tables they do for consumer cards, the Fed report notes.

Consumers won some extra protections under the Credit Card Accountability and Disclosure Act of 2009, but these do not apply to small business cards. For instance, consumers must get 45 days’ written notice of rate increases on new transactions and must be given the choice whether to pay “over limit” fees if they make charges over their credit limit (otherwise, charges get rejected). The Fed found that some small business card issuers are adopting some of these terms for their business cards voluntarily, but, since not all do so, you need to look carefully at any agreements you sign.

The upshot: If, like most business owners, you pay your balances in full each month, these terms won’t affect you much — and there’s probably little benefit in switching to your personal card. However, if you carry a balance and make frequent new charges, using a personal card instead may protect you from sudden rate increases.