Entrepreneurs Weigh Credit-Card Options

Small-business owners who rely on their company's credit card to purchase big-ticket items or finance day-to-day operations won't see any benefits from this month's federal credit-card reform—unless they put those expenses on a personal card.

The new law, which was passed last May and becomes effective Feb. 22, protects consumer cards against arbitrary interest rate increases, over-limit fees and clandestine term changes. But the reforms don't apply to the business cards used by many entrepreneurs, which may tempt some small business owners to give up those cards in favor of a consumer card.

The problem, says Gerri Detweiler, a personal finance advisor for Credit.com, is that business owners who rely on consumer cards could wind up damaging their personal credit scores.

Ms. Detweiler has long recommended that start-ups use small-business credit cards to separate business and personal expenses for tax and credit-report purposes. "But now this puts business owners in a tough position," she says. "Do they risk damage to their personal credit or do they stick with small business credit cards and risk having the rate jacked or terms changed midstream?"

Some 41% of business owners use a credit card of some kind to meet capital needs, in part because of the difficulties in securing bank loans or lines of credit, according to the latest year-end survey by the National Small Business Association, a Washington trade group.

The NSBA is concerned that credit-card companies might hike rates and fees on business cards to compensate for the revenue they will lose on consumer cards as a result of the legislation, a prediction that credit-card issuers repudiate.

"That assumes there's a correlation with what we do on the business side and the consumer side," says Tom Sclafani, spokesperson for American Express OPEN, the company's small business division. "Pricing is based on anticipated market conditions, disclosed account terms and an individual's borrowing behavior."

Kevin Reeth, owner of Outright.com, a Campbell, Calif., company that provides online bookkeeping services to small businesses, uses an American Express business credit card. He has at times inadvertently gone over his $3,000 credit limit and incurred a $35 fee. Under the new legislation, a consumer would be notified about such a fee before being charged.

Still, Mr. Reeth says he's sticking with the business card because sorting business purchases from personal purchases is a hassle.
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About three quarters of business owners most likely won't change their behavior, because they pay every month and are not impacted by the variable interest rates, according to Samir Kothari, vice president of products at BillShrink.com, a comparison site for credit cards and other products.

But the other 25%, which rely on the credit cards as a means to make payments and carry debt, may opt to use a consumer card, he says. "I imagine they won't just think about legislative provisions—they'll think about which is a better financial tool," he says.

There's also the risk that a card used excessively for business purposes, even if it's a personal card, wouldn't be protected, says the NSBA, since the new legislation is an amendment of the Truth in Lending Act, which excludes credit that is extended "primarily for business, commercial, or agricultural purposes."

Steve Navratil, owner of Accent Estates, a lawn care, tree care and pest management business in Bohemia, N.Y., has a Chase business credit card with an $8,600 limit. Accent Estates, which posted $100,000 in sales last year, averages $6,000 each month in equipment, gas and Internet search marketing expenses. But because the business is seasonal, Mr. Navratil carries a balance on the card during the winter months.

He worries about sudden or retroactive rate increases on that card, practices which will be abolished on consumer cards. "For paper trails and audit purposes, it's easier if I keep business expenses on a business credit card," he says. "But I'd consider switching to the personal card if interest went up to 20%."