In the past few years, large credit providers have been lining up to launch business credit cards designed specifically for small-business owners (see BusinessWeek.com, 6/29/06, "Best Credit Card for Small Businesses"). While these offerings prove the strength of the small-business segment within the U.S. economy, entrepreneurs as a group are still considered underserved by the credit industry. Smart Answers columnist Karen E. Klein spoke to Ruth Davis, vice-president of Dun & Bradstreet (DNB) Small Business Credit Products, for some insights on business credit. Edited excerpts of their conversation follow.
With all the efforts being made to tailor credit cards specifically for entrepreneurs, why is the small-business community still considered underserved by credit providers?
It's because so many small-business owners continue to use personal credit cards for their business expenses, rather than using business credit cards. Historically, it's been easier for people starting companies to use cards they've already established in their own names, rather than apply for a card in the company name. They are unaware of how critical building and managing their business credit is to the success of their businesses.
What's the practical difference between a personal card and a business credit card?
The processes for establishing the amount of open credit for the account and the interest rate are completely different. For the credit provider, they're looking at personal credit history vs. business credit history, though some applications for business credit cards will also take your personal credit history into account.
But more and more, we're seeing major banks make lending and credit decisions using automated processes, which look only at business credit. And as local banks continue to be purchased by larger, national banks, I think we'll see business credit records becoming increasingly important.
Why wouldn't an entrepreneur want to use her personal credit accounts to start up a company? What's the advantage to using a business credit card?
The major advantage is that when you open a business credit account, make purchases with it, and then pay them on time, you're establishing business credit in your company name. And, as I said, business credit records are becoming more important for all kinds of financial decisions.
I recommend that if your business is using anything established in your personal name, something like a telephone account or a bank account, you should put it in your business name. It makes your company more professional, and if you're purchasing and paying on time, it helps you gain a positive credit history that will help build up your business credit and improve it. And that will help you get better rates and terms in the future.
How does a startup company get a first credit card?
For a brand-new business, a credit provider will probably start by examining your personal credit history. Generally they'll also default you to a higher interest rate and a lower credit threshold until your company proves itself. The important thing to remember is that after six months of good history with them, you can go back and renegotiate your credit terms.
How should a small-business owner choose a credit card for his company?
Start by talking to your local bank, especially if you already have a business account established there. If you've been a good customer, they may be able to issue you a business card. Ask your accountant and other entrepreneurs for referrals.
The cards currently being marketed specifically to the small-business market may be worth investigating, because some of them have features tailored to smaller company use, such as discounts on certain purchases.
How could an entrepreneur try to get a better credit-card interest rate than the one that's offered to the general public?
Small-business owners should start by understanding how credit-card interest rates are established. Many banks establish interest rates through an automated decision process that involves set algorithms, especially for smaller accounts. Those that have poor credit ratings can pay interest rates twice those of companies with good credit ratings.
Entrepreneurs can check their credit ratings at www.dnb.com by clicking on "Update Your Profile Online" in the lower left corner. The more information they add about their companies, the more accurate their credit rating will be and the more credit they're likely to get. For businesses with poor credit ratings or no credit history, the top national banks might charge 18%, while companies with excellent credit ratings might be down around the 9% level.
There seems to be a strong independent streak among entrepreneurs, and many of them seem determined not to put their companies into debt. Is this sentiment misguided?
Not necessarily, but it can be limiting. Most small businesses will find it very difficult to expand to the extent they want to if they don't have some kind of revolving cash available to them, whether that's a small-business loan or a small-business credit card. For instance, a company that lands a large new customer may have trouble purchasing the goods they need to fill that customer's orders unless they already have access to revolving credit. The alternative is using up all your personal capital, which no one wants to do.
So, even if small businesses don't have an immediate need to pay on credit, it is a good idea for them to apply for and use a credit card. Using it and paying it on time builds up their good credit history, just like with a personal card. Also, most small businesses have cash-flow challenges, and a credit card can help them bridge this gap if and when the need arises.