Cash back credit cards aren’t just good for consumers. They can be a great way for business owners to maximize their savings – if used responsibly.
The last thing a business owner wants is to incur credit card debt, but if you can pay off your balance every month, cash back credit cards can benefit your business in several ways.
What is a cash back credit card?
A cash back credit card gives users cash rewards every time they make eligible purchases. Those points, or cash rewards, can be redeemed for a statement credit, a gift card, or a check. Some credit card issuers offer flat-rate cash back credit cards with rewards that apply to all of your purchases; others focus on specific spending categories.
For small business owners who make a lot of purchases every month, a cash back credit card can bring serious cash rewards. “Cash back cards are even more useful to a business than consumers,” said Ted Rossman, industry analyst CreditCards.comtold business.com. “Businesses tend to spend more. It puts a lot of money back into the treasury.” [Looking for a business credit card? Check out our recommendations.]
How do cash back credit cards work for businesses?
Competition in the credit card industry is fierce, with issuers vying for consumers and business customers. To entice potential customers to sign up for a card, card issuers offer generous benefits, including sign up bonuses and cash back rewards.
The credit card issuer may refund money to its customers for purchases due to the interchange fee it charges merchants for purchases made with its cards. They also strike deals with retailers to reward credit card users with cash for certain purchases.
Most cash back reward cards will give you 1% to 2% of purchases back in cash rewards, but some add up to 5%. For example, if you have a credit card that gives you 2% cash back on all of your purchases, you get $ 20 back for every $ 1,000 spent.
For consumer credit card users, it can take a while to earn significant rewards, but if you run a business and charge thousands of dollars every month, the money back can be significant. Suppose you spend $ 50,000 on your cash back card at a rate of 2%. That works out to $ 1,000. It goes up to $ 2,500 when you get 5% cash back on that rewards credit card.
Some cash back credit cards even offer balance transfer rewards, giving them cash rewards that can be redeemed for a gift card or statement credit. [Read related article: How to Get the Most Out of Your Business Credit Cards]
What are the types of cash back credit cards?
Cash back credit cards come in many types. Some are general credit cards with cash back rewards, while others target certain spending categories. Here’s a look at the three main types.
- Flat rate cash back credit cards give users the same cash back percentage for all daily purchases. They are attractive to business owners who want money back but don’t want to think about when to buy something to get the best reward percentage. It’s the easiest of the cash back credit card strategies, but it can get you the fewest number of rewards.
- Layered cash back credit cards reward users with varying percentages of cash back based on spend category. One credit card may return 5% cash to the gas station, 3% for food, 2% for travel, and 1% for all other purchases. A tiered cash back card is usually attractive to business owners who have different spending categories and want a more comprehensive rewards program.
- Revolving Cash Back Credit Cards give users different percentages of cash back for purchases in different categories on a schedule. For example, business owners get 3% cash back for travel one quarter and 5% cash back for office supplies the next quarter. To maximize the money you get back with this type of credit card, you need to stay on top of the rotating categories so you can time your purchases to get the higher rate.
“There are different cashback amounts [for] different categories, ”said Richard Kerr, editor for Loyalty and Commitment to The Points Guy“You have to go out and research and see where you spend the bulk each month.”
What are the pros and cons of cash back credit cards?
A cash back credit card makes sense on paper. Who doesn’t want discounts on their daily purchases? But that’s not the only benefit of using a cash back credit card.
Advantages of cash back credit cards
- Extra cash flow: For business owners who spend a lot each month, a cash back credit card can translate into extra cash flow. The key is paying off your balance every month, he said Matthew Gillman, CEO of SMB compass“What people don’t realize is that if you use it to pay vendors and suppliers, you get a discount, and it’s a byproduct [that] your margins are getting higher. However, having a balance with you can quickly cancel out any benefit.
- Business credit: The stronger your credit score, the cheaper it is to borrow money for your business. Credit cards are a great way to build your business credit score. If you use it responsibly by keeping your balance low and paying on time, it will boost your standing in the eyes of the rating agencies.
- Login Bonuses: Many credit card companies want your business and will use sign-up bonuses to lure you their way. These are bonus cash back rewards on top of the rewards you earn from purchases. Many of these card companies waive the annual fee.
Disadvantages of cash back credit cards
- High APRs: You may have the best intentions of paying off your business credit card balance every month, but if you don’t, the high annual percentage of cash back cards can hurt you. That is the total interest, including any costs. Sure, there may be an APR of 0% at the beginning, but that’s usually an introductory rate. If you can’t pay your balance every month, the interest could be higher than the money you’re trying to pick up.
- Cashback caps: Some business credit cards limit the number of cash rewards you can collect in a month or year. If the limit is lower than your spend in a particular category, that cash back credit card may not be the right one for your business.
- Hard to follow rules: Some business cash rewards credit cards have many rules, making it complicated and time consuming for you to get back as much money as possible. For example, which category gets back what percentage can be confusing to keep track of.
What credit score do you need for a cash back card?
Your credit score plays a direct role in whether you are approved for a cash back business credit card. Typically, the credit cards with the most generous cash back rewards are reserved for business owners with credit scores in the mid to high 700 range. Credit card companies also give these card customers the highest welcome bonuses.
Business owners with credit scores in the lower 700’s are eligible for most cash back cards, but some will be off limits to them. If your credit score is in the 600s, your options are more limited. You will likely still be approved for cash back cards, but they likely offer less generous rewards. [Looking for an alternative to a credit card? Check out our guide to choosing business loans.]
What should you consider when choosing a cash back credit card?
When looking for a cash back credit card, think about the type of consumer you are, Rossman advised. If you don’t want to go through the trouble of checking every item to see if it’s an eligible purchase, a fixed reward card is a hassle-free option. If you want more control, you do better with a cash back credit card that has tiered rewards or rotates categories quarterly.
Here are four tips to help you choose the best cash back credit card for your business:
- Consider your expenses. If a significant portion of your monthly budget is going to office supplies, then a cash back card that gives you the most for those purchases is what you should focus on. If you’re on the road for most of your day, a card that offers a higher rate of reward for travel or gas purchases should be on your priority list, Rossman said. [Read related article: How to Develop a Business Credit Card Expense Policy]
- Compare pay rates. Since getting money back is the main purpose of this type of rewards credit card, you should compare the reward percentage from one card to another. Pay close attention to any limits on the reward percentage and the categories that give you the most money back.
- Check out the sign up bonus. Credit card companies want your business and offer a welcome bonus to get it. When comparing bonuses for new cardholders, don’t be blinded by a big offer – you might get a big welcome bonus but lower cash back rates.
- Beware of feesMost cash back cards don’t have an annual fee, but some do, so it’s important to read the fine print. When shopping for a credit card, make sure there are no fees that put your rewards at risk. If a credit card company charges an annual fee, evaluate if you’re still ahead based on the cash back percentage you can earn.
“You really have to do your research and make sure you get the biggest money back,” Kerr said. ‘Don’t be surprised by the fees. Be very willful. ‘ [Read related article: Looking for a Business Credit Card? Discover Exec Highlights What to Consider]
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