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These days lenders are actively attempting to encourage small business owners to open up business lines of credit by offering a multitude of new credit card products, some of them linked to very generous reward incentive programs.
A large part of the motivating factor is made clear by data that was released over the summer by Washington D.C.’s National Small Business Association which revealed that some 80% of small businesses in the United Sates rely upon credit cards to provide some portion of the necessary financing to run their company and nearly 42% of small-business owners carry outstanding credit card debt.
The Legal Distinction Between Business and Personal
However, if this debt is being carried on a business credit card account as opposed to a personal credit card account, it quite likely lacks consumer protections.
This is because the Credit Card Accountability Responsibility and Disclosure Act of 2009 which was enacted in order to protect consumers from any unfair business practices that may be exerted upon them by credit card companies. Because of this Act, issuers cannot raise the interest rate on a cardholder’s existing balances unless they are more than 60 days overdue with a payment. However, because small business credit cards were excluded from the CARD Act, lenders can change the rates on a whim for business lines of credit.
In fact, some critics accuse credit card issuers of having a keener-then-ever interest in having small business owners country-wide open up business lines of credit specifically because of the reduced consumer protections covering those cards in comparison to personal cards. While a few lenders have opted to apply most of the major provisions of the CARD Act to their small business credit cards as well, most have not.
Business Cards Have Advantages
Another benefit business credit card accounts afford issuers is the ability to, if the cardholder is paying two different rates on one card – for example one rate on purchases and another rate on a transferred balance – any portion of the monthly payment that exceeds the minimum they are able to apply to the amount with the lowest interest rate first. This is in contrast the same two rate situation on a personal credit card account, where, under the CARD Act, the payment must be applied to the balance with the highest interest rate first in the interest of keeping costs low for the borrower.
The biggest incentive for small business owners to use credit cards as a means of financing their business endeavors is because credit cards are currently among the safer financing options available. Because credit cards are unsecured loans, the borrower does not have to put up collateral against what is borrowed as is required in the case of a small business bank loan. In those situations, borrowers often risk their business’s equipment or machinery or even the equity on their home in order to borrow money.
Use A Combination of Both
One option for small business owners is to use a personal credit card account as opposed to a business credit card account. That way, the account is protected under the CARD Act and will likely have a lower APR than an equivalent business card account. However, opening a business line of credit may avail the account holder of better rewards and added perks such as free online access to invoicing , cash management and budgeting tools.
Either way, the holder of a business credit card is personally liable for that debt.