There is a common problem in small business finance that may go unnoticed by small business owners: Entrepreneurs often turn to consumer and personal credit card products for business spend. There are ramifications of this habit — both legal and financial — yet it persists.
Sean McQuay, the resident credit card expert at personal finance resource NerdWallet, told PYMNTS that this problem is likely due to the fact that many small and medium-sized business owners aren’t even aware of more adequate card products for business spend.
“I do not believe that small business owners are sufficiently aware of their options,” he said in a recent interview. “It’s constantly shocking to me how individuals choose their card based off of maybe what they heard some random person mention, or an ad on TV, or signed up at their local bank.”
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Blindly choosing a credit card product is a problem for both small businesses and individual consumers, McQuay explained. And while the card options that result from these uninformed strategies may not necessarily be bad, they often aren’t the best for that customer.
“I think that goes double for businesses,” he said. “If they have a small business card at all, it may have been with the bank they use on a daily basis or a bank that gave them a loan for convenience’s sake, and they never bothered to look and see if there is a card with more rewards or rewards that line up better to how that business functions.”
NerdWallet works to enlighten consumers and small business owners of their choices and help individuals become educated in personal finance matters across the board. As a part of that effort, the site released its Best Credit Cards of 2016 shortlist.
According to McQuay, analysts at NerdWallet looked to design an objective rubric of factors to guide how card products were scored; for consumer cards, these included features like cash back, travel rewards, general rewards and the like.
As it turns out, McQuay said, judging small business cards occurred in much the same way.
“Small business credit cards really fit in the same categories that you think of for individuals,” he explained. “We decided to use those same rubrics we developed for the consumer credit cards for the business credit cards as well.”
The result is a shortlist of small business credit card winners in multiple subcategories: no-fee cash back, top rewards with a sign-up bonus and business travel benefits, with the Chase Ink Cash Business Credit Card, the Chase Ink Plus Business Credit Card and the Business Platinum Card from American Express OPEN taking home the top spots for these categories, respectively.
The methodology for ranking small business credit cards sheds light on these products that are both similar to and different from consumer card products. Small business owners want cash back or travel rewards just like consumers do, but, McQuay cautioned, the two products can’t — and shouldn’t — be interchangeable.
“Consumers should not be using small business credit cards,” he said. “The same goes for businesses. They’re potentially violating the rules as a Limited Liability Company. They’re bleeding the difference between their personal and professional life, which is really important for a small business owner to not do. They need to make sure they’re separating their finances as much as possible.”
Luckily, small business owners have a lot to choose from when they decide to separate their personal from business spend.
“I don’t see a lack of competitiveness in the credit cards being offered,” McQuay said. “I don’t know if there is enough or too few, but at least there are enough of the good kind and enough competition to enable really good small business credit cards.”
As more small business owners take the leap into the card space, the credit card analyst pointed to a few market trends on the horizon.
For instance, while corporate commercial cards may struggle to get integrated into mobile wallet solutions, the back-end infrastructure of small business cards is far more aligned with consumer cards, making technical hurdles to hop onto tools like Apple Pay and Samsung Pay a bit easier to overcome.
McQuay also noted that the volume of applications for small business credit cards is on the rise. This is, in part, due to the continued tightening of business loan controls; credit cards, despite high interest fees, can provide affordable financing in the short term, the analyst said. Plus, more small business card issuers are offering zero percent APR periods, which is also attracting more applicants.
And as the line between consumer and small business card products becomes clearer for small business owners, McQuay said that card issuers will continue to gear their reward programs more towards the end user. That means small business cards will offer perks like cash back for goods purchased for the company, billing processes, taxes and other business expenses.
But to get the most out of a small business credit card, McQuay said, small business owners need to do their research. “There are myriad programs out there that small business owners may be unaware of,” he explained. “And I believe they are.”