Starting a small business is a daunting and life-altering task. While some entrepreneurs are lucky, most do not have the funds immediately available to establish a business. Not only are there costs associated with securing a location, recruiting employees, and various other startup expenses, but getting the entire enterprise on its feet takes most of your time — and you still need to eat, sleep, and pay for your electric bill.
What’s more, running a business is filled with unpredictability. Just when you think that you’re established, you find yourself looking into your retirement account to fill the gap in daily expenses. Or one of your employees runs up to you midday, screaming about how you’re out of thermal paper, and you end up handing over your personal credit card to cover it. Or you apply for a loan, only to find out that your business credit matters just as much as your personal credit.
The finances of small businesses are difficult and intricate, and adding the complexities of credit cards might sound like a nightmare, but it can actually be your saving grace as an entrepreneur.
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How Do I Use a Business Card Responsibly?
When you get the ball moving on your business, be conscious of how you use your business credit card. You’ll be personally responsible for any financial missteps. With every purchase, you’ll have to weigh your options. Is it better to use your personal or your business card? Take these factors into consideration:
- Are you going to be able to avoid interest on this payment? The CARD Act does not apply to business cards, so companies are free to raise your interest rates with time on existing payments. If your revenues aren’t predictable enough for you to make payments on time, you could wind up creating extra debt for your company.
- Be aware of how long your zero-rate introductory period lasts. Many cards offer a period of zero or low interest after you first sign up, so plan accordingly. You’ll want to be careful about making major purchases if there’s a chance you won’t pay them off before your interest rate changes.
- Know that your business credit can affect your personal credit. Many credit companies will report your habits to consumer credit bureaus as well.
How Do Business Credit Cards Work?
Handling your business expenses is complicated. If the business grows enough, then expense tracking will most likely keep one person busy full time — or even an entire department. Keeping that in mind, it’s crucial that you keep your business finances separate from your personal finances.
This might sound simple at first, but it can get more complicated as time goes on. With every purchase that you put on your business card, ask yourself, “Is this purchase directly helping further my business goals?” Dinner with colleagues to discuss strategy, perhaps, but the cocktails you had afterwards? Generally, alcohol is not considered a qualified business expense, so you might need to pay for those separately on your own tab.
However, even the average entrepreneur should take advantage of their benefits. Business credit cards accumulate different rewards. You’re more likely to regularly spend money on office supplies, for example, than the average individual. Some business cards consequently offer rewards that focus on office supplies, travel miles, or other common business expenses. There are flat-rate rewards you can choose instead, where you are rewarded minimally for all expenses, but if you find yourself constantly buying printer ink or plane tickets, you might want to rethink your rewards program.
Many business cards also offer easy ways to complete expense reports or otherwise track your spending. This is extremely helpful come tax season, especially if you’ve kept your personal and business finances separate. Instead of sifting through individual receipts, you’ll have clearly organized expenses associated with two separate spending accounts. You can spend a few hours filing your taxes instead of several days.
Your business card will have a higher limit than most personal cards, but you still need to keep the spending limit in mind. Setting up different auto-payments on the card will save you peace of mind, not to mention build your business credit.
However, auto-payments can also cause you to go over the limit after some unexpected fluctuations or emergency purchases. It’s especially important that you keep track of all financial activity on the card, not only to mitigate credit card fraud or identity theft, but because your employees’ livelihoods depend upon your business’s financial health.
When Should You Use Your Business Credit Card?
There are some purchases that you should definitely put on your business card. Not charging these items is a disservice to yourself and your business.
You ought to purchase appliances on the card, especially if your credit card offers an extended warranty program. Make sure to keep the statement showing your purchase, the original warranty, receipts, and any other relevant documentation. Doing so can save you a headache later on. Many manufacturers’ warranties only last a couple months, and having an extended warranty to fall back on can be a lifesaver.
Make sure you’re also covering employees’ business expenses. This might sound obvious at first, but you’d be surprised how many businesses expect their employees to shoulder the cost of daily items. Not only does covering their expenses help them out, but it also gives you a clearer idea of what your real operating costs are. Of course, giving an employee their own card is a sign of utmost trust, so exercise caution if you decide to go that route.
Additionally, whenever you travel for business, make sure you’re using the card. Your flight tickets, the hotel, and any additional standard travel costs can be charged. This is a reliable way to build rewards miles, as well as keep your business expenses and any personal expenses you may incur on the trip separate.
When Should You Not Use Your Business Credit Card?
Well, besides irresponsibility, how should you not use your business card, specifically? There are a few big mistakes that you should avoid.
If you’re uncertain about your business’s future, whether because of an unsteady start or a shaky expansion, try and hold off on using your credit card as much as possible. Desperation might be changing your perspective, but remember that every dollar you fail to pay back will just become more expensive later on.
For example, if your business is struggling to pay your employees, you may be tempted to put payroll on your credit card. While you might think this is your only option, payroll tends to be one of small business’s greatest expenses. Charging such a large sum of money on a card is a surefire way to guarantee you don’t pay it back in time. This will only further your business’s problems in the future.
Don’t pay your taxes with a credit card. You might have to pay the creditor more than what you charged on the card, thanks to interest, but you’ll also definitely have to pay more than what you owe to the IRS. The IRS does not pay your credit card’s processing fee. That fee is usually absorbed by the business that you buy something from, but the IRS does not pick up that bill. So even if you do pay your balance back on time, you’ll definitely pay more to the creditor than you owe in taxes.
Owning a small business is one of the biggest risks you can take. Entrepreneurs in particular risk everything to see their dream realized. You have to put your trust in yourself to the test, but that is not enough. The trust of friends, family, and, yes, multinational financial institutions is critical to moving your business in the right direction, no matter what stage you’re at.
A business credit card is a tremendous tool you can use to get a head start, earn the perks that you deserve, or expand into that second location. The only real limit is your own resourcefulness — and whatever number you and the credit card company agreed to.
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