It’s easy to get distracted by generous welcome bonuses and benefits, but when choosing a business credit card, the interest rate is one of the features to pay most attention to. Even if you plan to pay your credit card off in full each month, things happen. A project gets delayed or an unexpected expense comes up, and before you know it, you’re carrying a balance.
A business credit card with a lower interest rate can give you more room to manage cash flow without watching interest charges erode your bottom line.
Here are some of the reasons why interest rate matters when choosing a business credit card, and what you can do to secure a better interest rate.
Affects the cost of borrowing
If you regularly carry a balance on your business credit card, the interest rate is an especially significant factor. A higher rate means it costs more to borrow money. Increased spending on debt repayment cuts into your business’s profit, taking money away from other objectives and opportunities.
A low-interest business credit card can help reduce the cost of debt, making it less stressful if you have to carry a balance.
Cash advance
Your credit card interest rate is also something to consider if you occasionally use a cash advance. The interest rate for a cash advance is typically higher than for a regular purchase.
For example, if your regular rate is 20%, you might pay 23% for cash advances. Plus, there’s no interest-free grace period with a cash advance; you start paying interest as soon as you take the cash out until you pay it back in full.
Some low-interest business credit cards offer lower rates on regular purchases and cash advances, which can help to keep costs down.
Impacts cash flow flexibility
With a high-rate credit card, carrying a balance can strain your cash flow.
For example, say you have a client who is 45 days late paying a large invoice. During this time, you have to meet payroll, purchase software licenses, and pay office expenses. Now you’re in a situation where you have to carry a $10,000 balance.
With a business credit card that has a 20% rate, you’ll have to pay approximately $167 per month in interest until you pay off your balance. With a low-interest business credit card that has a rate of 10%, you’ll only pay approximately $83, which is a $84 monthly difference.
This might not sound like a lot of money, but if cash flow is tight, every little bit can make a difference.
Reduces the benefit of rewards
Sign-up bonuses, cash back, and airport lounge access are valuable perks, but only when the cost of carrying your card doesn’t exceed the value of the rewards you earn.
A high-rewards card can begin to lose its value if you’re constantly bogged down with high-interest payments. A business credit card with a lower interest rate might deliver more value than the most generous rewards credit card if you have to carry a balance.
Unpredictable payments
Many business credit cards in Canada have variable interest rates that rise or fall based on the bank’s prime rate.
For example, a card might have a purchase rate of 1.5% plus the bank’s prime rate. If you carry a balance and the prime rate drops, this means your interest payments go down. But if rates increase, so will your monthly payments.
Changing rates can make it harder to predict your payments and develop a consistent monthly budget.
How to get a better rate on a business credit card
Having a solid personal or business credit score opens up more credit card options with better terms and a lower interest rate.
To increase your chances of qualifying for a low-rate credit card, focus on paying down your debt. Paying your balance can help increase your credit utilization, which is an important factor in determining your credit score.
Paying your credit card bill on time every month can also have a positive impact on your credit profile, since your payment history accounts for the largest portion of your score.
Is a low-rate business credit card right for you?
When choosing a business credit card, pay special attention to the interest rate. While it’s usually not the flashiest feature of a new credit card, it’s one of the most impactful. Even if you plan to pay your credit card balance in full each month, running a business can be unpredictable. You might have months where you have to carry a balance, and this is when you’ll feel the difference of that lower-rate card.
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