As you consider improving your business’s cash flow, you may consider either a business credit card or a charge card as an option.
But how do these differ?
This article aims to demystify the fundamental differences between charge cards and business cards, to help you choose wisely.
What is a Business Charge Card?
Unlike traditional credit cards, charge cards provide flexibility without a preset spending limit. The key features of business charge cards include:
- Flexible spending is determined by purchase patterns, payment history, and financial resources. There is no strict cap.
- Full monthly balance must be paid, promoting financial discipline and avoiding debt accumulation.
- Extended payment periods of up to 54 days support cash flow management.
When used strategically, business charge cards offer advantages for optimizing cash flow. The most common example of this type of card would be American Express.
What are Business Credit Cards?
Unlike charge cards, business credit cards offer companies revolving credit and greater flexibility in managing cash flow. You don’t have to pay them off each month.
The key features of business credit cards include:
- The preset spending limit provides a spending cap for each billing cycle. This acts as a safeguard on credit.
- Option to pay the monthly balance in full or carry a portion over with interest charges. This supports cash flow when funds are tight.
- Interest accrues on carried balances, which provides payment flexibility but can add up over time if prolonged.
Read our review of the Best Business Credit Cards.
Comparing Key Features of Business Charge Cards and Credit Cards
Pre-set Spending Limit
- Business Charge Card: No limit. The spending limit fluctuates based on factors like the company’s financial behaviour, purchase patterns, and trustworthiness.
- Business Credit Card: Set limit. Each card comes with a predetermined spending cap, ensuring businesses remain within their creditworthiness.
Interest Charges
- Business Charge Card: Typically, no interest charges, given that the balance must be cleared each billing cycle.
- Business Credit Card: Interest applies if a business carries a balance beyond the billing cycle. These charges can accumulate if only minimum payments are made over extended periods.
Payment Dynamics
- Business Charge Card: Requires businesses to pay the full balance each billing cycle.
- Business Credit Card: Offers flexibility in payments, allowing businesses to either clear the balance in full or carry a part to the next cycle.
Charges for Overdue Payment
- Business Charge Card: Penalties can be stringent, including hefty fees and potential card cancellation.
- Business Credit Card: Typically involves late fees and potential hikes in interest rates.
Cash Flow and Business Financial Health
- Business Charge Card: Can optimize cash flow with extended payment periods, ensuring businesses have funds when needed.
- Business Credit Card: Offers the advantage of improved cash flow by providing the option to manage balances over periods, especially during tight cash flow situations.
Frequently Asked Questions
What is the fundamental difference between Charge Cards and Credit Cards?
Credit Cards have a set spending limit each billing cycle and allow businesses to spread out their expenses over time with a revolving balance. On the other hand, Charge Cards don’t have a pre-set spending limit and mandate the user to pay off the entire balance each month.
What are the repercussions if a Charge Card balance isn’t cleared in full?
Failing to clear a Charge Card balance within the stipulated time can lead to interest charges, additional penalties, and even potential cancellation of the card.
Does obtaining a Charge Card influence your credit score?
While Charge Cards can have an impact on your credit score, they typically don’t influence it as profoundly as Credit Cards. This distinction arises because Charge Cards lack a fixed credit limit and aren’t included in your credit utilization ratio.
How do rewards differ between Charge Cards and Credit Cards?
Both card types might offer rewards, but the structure can differ. Charge Cards often focus on tailored rewards for businesses, such as travel perks or exclusive offers. Credit Cards, conversely, might offer a broader range of rewards based on spending categories, including points, cashback, or miles.
Are there any advantages to having both a Charge Card and a Credit Card for a business?
Yes, having both can provide flexibility. A Charge Card can be beneficial for larger purchases that the business intends to pay off quickly, while a Credit Card can offer a cushion during periods of fluctuating cash flow, allowing for balances to be spread out over time.
