We are not going to get into the intricacies of the small business credit card industry, but since you already borrow or are contemplating borrowing money for your business from a small business card company, we think understanding how they make money may be useful.
The number one money-maker for credit card companies is the interest charged if you hold a balance. If you are the type of customer that pays your bill at the end of the month then you are most likely not paying any interest. However, we know that many small businesses use their credit card for cash flow and carry a balance. The interest rates (10% – 22%) charged on credit cards are far higher than most other types of loans. The higher interest rate is primarily due to the lack of collateral on the money borrowed, unlike your mortgage, home equity line or car loan. Since the credit card companies cannot possess your house if you fail to make payments, they are charge a higher interest rate.
Small business credit card companies also charge an assortment of lucrative fees and they include:
Late payment fee: If you pay your credit card bill late you will most likely get hit with a penalty fee. These fees will range from $15 – $39 depending on the type of credit card and the amount of balance at that time. In addition to the late fee, most credit cards will also increase your interest rate after you pay your bill late. This is often referred to as “Deflult APR” in your cardmember agreements. The Default APRs typically approach 30%.
Over-the-Credit-Limit fee: This fee applies when your charge more to your credit card than the allowed limits. In many cases these charges actually go through and your card is not denied at the register. However, it will mean that your account gets hit with a penalty fee for exceeding the limit. This fee typically ranges in the $28 – $39 range, and the company will continue to charge this fee every month until the balance is brought below the allowable credit line.
Balance transfer fee: Small businesses are often offered an opportunity to transfer balances from one credit card to another for a promotional lower interest rate. What most people do not realize is that the credit card company will also charge a fee to transfer over any balances. This fee is typically 3% of the amount being transferred or a minimum of $5.
Cash advance fee: Small business credit cards can be used at an ATM to receive cash. If you elect to withdraw cash using your credit card you will get hit with a onetime fee and higher interest on the cash that was drawn. The onetime fee is typically a percentage (3% – 5%) of the amount cash withdrawn or a minimum of $10. Interest will be charged immediately on the cash amount (no grace period like store purchases) and the interest rate is typically 24% or higher.
Annual fee: Certain small business credit card companies also charge an annual fee. This is the money you pay upfront to use the credit card.
Interchange/Transaction fee: Small business credit card companies also collect a fee from the merchant that accepts credit cards. Typically the merchant pays 2% of the value of every transaction to credit card companies. The small business credit card company that issued your credit card, Chase, Citi, Capital One, etc., typically will get 80% of the fee.
Finally, Small Business credit card companies also sell third party product and additional services to their credit card customers. If you have at least one credit card, you are probably familiar with the offers that come in your monthly statements. These offers typically advertise third party products and/or services including payment protection insurance, life or auto insurance, accidental death and dismemberment insurance, memberships to buys clubs, travel protection insurance etc. The small business credit card company earns money for every customer that purchases these products.