What's the difference between a business charge card and a credit card?

August 30, 2016

When you run a business, having steady cash flow is essential to a smooth operation. For many small businesses, experiencing a seasonal rush, a late payment, or just weathering the common supply-demand ebbs and flows of day-to-day business can disrupt the smooth sailing.

Creating accessibility to cash makes everything easier—if you use the cash right.

Charge cards and credit cards are two tools used by many business owners to access funds. But these two types of cards are not the same. Although a business charge card can be considered a type of credit card, it comes with some variations that business owners should understand.

Business charge cards work best for credit-worthy applicants. Generally, you’ll need a higher credit score to qualify for a charge card. As always, lenders need to minimize their risk of borrowers defaulting—so they will pay special attention to your credit score.

In addition, charge cards are different in a few other ways:

1. No pre-set spending limit
While credit cards have spending ceilings, charge cards don’t. Lenders can always impose some spending boundaries, so it’s not a total free-for-all. But the absence of a pre-set spending limit enables small business owners to take advantage of time-sensitive opportunities that require immediate access to cash.

Compared to pursuing a small business loan, which can be a lengthy process, small business owners with charge cards can make immediate purchases on inventory or supplies for a large or unexpected rush job. The balance is to be paid off in full at the end of the billing cycle.

Your pre-set credit card limit is usually determined by your income and credit score. If you need more credit, you’d need to contact the lending company. This could require re-qualifying with a new credit check and income verification, which could also take time that you don’t have to spare when a customer’s order is on the line.

2. Pay the balance in full
Credit card users know that making a monthly minimum payment on time is what’s required to keep most credit cards in good standing.

The major difference between credit cards and charge cards is that paying off the balance in full each month is required for charge cards. Not doing so subjects you to heavy late payment fees and the risk of damaging your credit.

This is a critical difference for small business owners weighing the pros and cons of charge and credit cards. If cash flow is tight one month, a credit card gives you the option to make just the minimum payment and “float” the cash until the next month. In this way, credit cards give you more flexibility with payment terms.

3. Hefty late payment fees
Late fees on charge card balances can hit hard. But keep in mind that the idea is to carry a zero balance on a charge card. You are meant to pay it off in full at the end of each billing cycle.

American Express, the largest US holder of charge cards, charges $25 for the first time late payment on your charge card. This fee increases to $35 for the next late payment within the following 6 billing cycles, and then to $35 or 2.99% of the outstanding amount if you’re late with two or more payments in a row.

Compared to the brand’s regular credit cards, which charge a late fee of the lesser of $25 or your minimum payment amount, charge card late fees are substantially higher.

4. No interest rate
Another key difference is that charge cards don’t charge interest.

Yes, that’s right! Charge card borrowers borrow money interest-free—as long as you pay off the full balance before your statement due date. This follows the charge card rule of not carrying a balance.

Should you go with a charge card, staying on top of payments is critical to keeping your credit score intact.

To re-cap which card is the better choice for your scenario, a charge card is a good tool for you if you can pay off your full balance every month, and need flexible limits for a less predictable large orders.

A business credit card, on the other hand,is a more flexible option for accessing capital with the option to make a minimum monthly payment and carry a balance without late payment fees.

Get more tips for your small business from Fundera!


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