Credit cards are convenient and can be valuable for a business which 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 card 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 5 tips which any business should know about credit cards before you just 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 key advantages if you are a small but expanding business. You can have copies of the same business credit card, which will let you and your subordinates make purchases on their own. Paying off business credit cards also improves your business credit, which will make it easier to get loans on better terms. 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 minimum, do your research on 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 which will be well-suited for your particular business. For example, if you or your workers have to travel a lot, then a card which offers 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 what the payment plans are. If you are worried about credit card fraud, you should also see what protection plans are offered.
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 exactly 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 personal 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 that he can pay for business expenses without having to front his own money and wait for a reimbursement.
Obviously, you should not just hand those credit cards out. Business credit cards should only go to employees who regularly make big or important purchases for the company, or for those who are away from the office.
It’s important to trust and verify. If an employee uses his business credit card for personal expenses, your business will be held liable. While you can obviously fire him, abusing a company credit card is not a criminal offense.
5. Use your credit card as little as possible
Credit cards can be useful as an emergency cash resource, and can 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. Even a bank loan’s interest rates will normally be lower compared to a business credit card.
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, then you can find yourself facing mounting high-interest debt, which will destroy your business. Try to avoid using it for big purchases unless you have no other option.