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Credit cards are convenient and valuable for a business that needs a temporary infusion of cash. The Federal Reserve observes that in 2009, 83% of small businesses used credit cards, with 41% using personal cards. Despite this massive use of credit cards, small business credit cards only account for a small portion of small business debt, as most business owners have the sense to pay back their credit cards every month.
However, there is more to using a credit card for your business beyond “pay the credit card back at the end of the month.” Here are five tips that any company should know about credit cards before you decide to use your MasterCard to buy office supplies.
1. Know the difference between personal and business credit cards
There is nothing wrong with using a personal credit card to handle business expenses, but you may want to get a business credit card instead.
Business credit cards have some critical advantages if you are a small but expanding business. You can have copies of the same business credit card, letting you and your subordinates make purchases independently. Paying off business credit cards also improves your business credit, making getting loans on better terms easier. On the other hand, business credit cards lack the consumer protections of personal credit cards.
If you want a more detailed list of the differences between a business and personal credit card, NerdWallet has an excellent article on the subject and which one may be right for you. At a minimum, research which one your business should go with.
2. Look for the best rewards plan
Don’t just go with the first credit card plan that looks alright. Many business and personal credit cards offer unique rewards that will suit your particular business well. For example, if you or your workers have to travel a lot, a card offering airline or hotel perks would be ideal. If you drive a lot, then gas rewards would be great.
Also, compare monthly fees, interest rates, and payment plans. If you are worried about credit card fraud, you should also see the protection plans.
3. Never mix up personal and business expenses
Even if you decide to stick with a personal credit card, you should never use the same credit card to buy office supplies and groceries.
The big reason is for bookkeeping purposes. When it is time to pay back your credit card at the end of the month, it can be tricky to figure out what goes under business expenses and what does not (if you mix them up on the same card). By keeping separate cards, you can know precisely how much your business spent without needing to go over every single item.
Furthermore, if you go with a business credit card, using the business credit card for personal finance shows a lack of seriousness about your business. Keep business to business and your expenses personal.
4. Be careful with who has your business credit card
As noted above, one of the advantages of a business credit card is that you can make multiple copies and hand them to your employees. If you have an employee who makes large purchases, giving him a company credit card means he can pay for business expenses without having to front his own money and wait for a reimbursement.
You should not just hand those credit cards out. Business credit cards should only go to employees who regularly make big or essential purchases for the company or those away from the office.
It’s essential to trust and verify. If an employee uses his business credit card for personal expenses, your business will be liable. While you can fire him, abusing a company credit card is not criminal.
5. Use your credit card as little as possible
Credit cards can be helpful as an emergency cash resource and help track your expenses. However, there are risks to becoming dependent on them.
A small business will always have funding options. Talk to investors, ask your friends and family for funds, and tap into personal accounts. A bank loan’s interest rates will generally be lower than a business credit card.
Conclusion
Credit cards have value for some of the reasons noted above. Plus, spending a certain amount and paying it back every month can improve your business credit rating. Remember, if you use it too heavily, or if your business suddenly hits a downturn, you can face mounting high-interest debt, which will destroy your business. Avoid using it for big purchases unless you have no other option.
