Why You Need to Stop Using Your Personal Credit Card for Business
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As a small business owner, it can be tempting to use every avenue available to you in the pursuit of financing and growing your business. Often, business owners will pull out their personal credit cards when purchasing items or equipment for their business, not realizing they are missing out on potential benefits. Using a personal credit card for business purchases may also lead to problems when reporting income when tax time arrives.
This article will discuss the top reasons not to use your personal credit card for business expenses, why, and what to do instead.
Can I Use a Personal Credit Card for Business?
First, of all, it’s important to note that yes, technically you can use a personal credit card for business expenses, but it is not recommended. If you have more than one personal credit card, you could set it aside for business purposes only. While this can help you avoid the potential for incorrect financials, it does still have its downsides. The best way to ensure that you’re not exposed to liability risks, business expense tracking issues and tax concerns is to use a business credit card or other business funding options like a business loan to pay for your business’ expenses.
Building Business Credit
When first starting, using a personal credit card for business expenses may be the only source of funding you have. After all, you’re not likely to have a significant financial history for the business, and you may not have much revenue. However, this is not a great long-term strategy.
You should consider your business separate from your personal financials from the very beginning. Doing so can help you to build your company’s credit score, which you’ll need as the business continues to scale.
Over the long term, your business credit will become more important to the overall health of your business for several reasons. Thus, it's best to avoid using a personal credit card for business purchases if you can help it.
Maintain Personal Liability Protection
The entity structure that you use to set up your business can provide you with some protection from personal liability should your company fall into debt that it can’t manage or take an action that results in a lawsuit. Common structures that provide personal liability protection include an LLC or corporation.
However, if you fail to keep your business and personal finances separate under these structures, a court could find that you have pierced the corporate veil. This can result in a loss of personal liability. Thus, keeping separate accounts for your business and personal expenses is very important if you are trying to protect your assets.
Improves Bookkeeping Accuracy
If you have an accountant or outsourced bookkeeper who takes care of your books, they are unlikely to know when you’ve made a business purchase using your own funds.
You’ll want to include the purchase on your business tax returns because it could potentially reduce your tax liability. However, if no one knows about the purchase but you, your financials are likely to be incorrect.
Build Your Company’s Credit History
Over time, your company will need to have its own credit history. This can help it to obtain significant funding to purchase large-scale equipment or for other purchases in the future.
If you’ve been running your business using your personal finances, you’re not likely to have much of a credit score. This can cause significant issues in the future, especially if your revenue suddenly ramps up and you need to purchase new equipment or hire more employees to support growth.
Scale Your Credit Card Use
At some point, you may need to provide your employees with a corporate credit card to handle their own corporate purchases. If you’ve already established credit for your company, obtaining corporate credit cards that your employees can use is much easier to do. You can also set up spending limits to control the amount of debt they can add to the company.
Business owners who consistently use their personal credit cards for business purposes generally won’t be able to obtain corporate credit cards for their employees. They also aren’t likely to feel comfortable handing over a personal credit card for their employees to use. It can potentially lead to theft or mishandling, which is an issue you don’t want, especially when growing your business.
Build More Spending Power
As a company grows, it will likely need more funding to scale the business. By building your company’s credit history, you lay out the footwork for obtaining financing in the future. This can allow you to get a commercial term loan, SBA loan, or equipment loan at low-interest rates when you need it the most.
Rewards and Benefits
Besides building business credit over the long term, using a business credit card can entitle you to certain business card rewards. You may be able to receive money back on your purchases or obtain low-interest rates through a business credit card.
Many business cards also offer points or travel miles when making certain purchases. A personal card won’t be able to match the advantages that a business credit card offers.
Certain business credit cards can integrate with accounting systems to help you manage your company’s finances. Integrated financial systems can allow you to better track your company’s financials and spending. They may also offer discounts when used with specific merchants.
Consequences of Using Personal Credit Card for Business Expenses
Can I use a personal credit card for business purchases? Yes, you can, but there are many consequences that may arise. If you do choose to use your personal credit card for business expenses, you may run into potential tax issues. This can happen if you make a purchase for the business using your own credit card or don’t adequately account for the purchase in your business finances.
In addition, interest on personal credit cards may not be written off on your business tax returns. However, interest paid on business credit cards may be fully deducted.
There are also potential legal issues that may arise if you continually mix business and personal finances. Suppose you are the subject of a lawsuit and have a company structured as an LLC or a corporation—certain protections afforded through the structure of the entity guard personal assets. You can lose those protections by mixing your business's finances with those of your personal accounts.
If you decide to use a personal card for business expenses, make sure that you track them carefully and share them with your bookkeeper. This can help to ensure that your company’s financials are accurate.
Finally, credit card agreements often include terms that prevent individuals from using them for business purchases. You should definitely review the terms of your credit card agreement to make sure you aren’t violating them. If your creditor finds that you have violated the terms of the agreement, they can close your account. This would reduce the amount of credit that you have available for personal use.
What If You Don’t Want a Business Credit Card?
You certainly don’t need a business credit card to open and run a business. You can use loans or other funding sources to pay for business expenses. That said, when looking at the big picture, there aren’t a lot of downsides to obtaining a business credit card. Just because you have one doesn’t mean you have to max it out. You can use it for emergencies only or set a spending limit to avoid taking out too much debt in the early days of owning your business.
Final Thoughts on Using Business vs Personal Credit Cards
Can you use a personal credit card for business? Yes, you may — but you’re setting yourself up for potential problems down the line. It’s best to build your company's credit history just like you would for personal purposes. That way, you are better positioned to obtain funding for your business if you need it in the future.
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