Many businesses make use of business charge cards or credit cards. With a business card, companies are able to track expenses and categorize those expenses by date, type, and location. Business cards can be a powerful tracking tool for companies as they expand, helping them never miss out on tax-deductible expenses as they would if they allowed employees to use personal cards. It’s easy to make mistakes with business credit cards, however, and missteps can leave you in debt. It’s important to watch out for common mistakes.
1. Spending freely on a new idea with your credit card
As with personal credit card debt, business credit card debt is easy to rack up, and painful to pay off, especially when there is a high-interest rate involved. It’s the reason why you shouldn’t use your credit cards to fund untested business ideas.
You need to use credit card debt only to power ideas that you know will work. For instance, if you’re starting a business card printing company, you shouldn’t use your business credit card to buy up lots of inventory even before you know that things will work out. What you should do is to show your best designs to customers, learn which designs are likely to work out, accept preorders, if possible, and order inventory with your credit card, based on customer interest.
2. Handing business credit cards to employees without issuing a spending policy
When you give your employees their own business credit cards, it can make life easier when you need to delegate responsibility. If you don’t have a well-defined spending policy, however, a single shopping outing for supplies for the office can end up costing you too much.
As your business credit card balance rises, it could hurt the credit score of your business, or even your personal credit score.
What you need to do is to set strict spending limits on the credit cards that you issue to your employees. If you can’t ask your credit card issuer to set limits, you should issue policy guidelines for how much employees are allowed to spend. It can also help to set alerts to be notified each time an employee spends on their card.
3. Thinking that overspending is okay because you get tax deductions
Sometimes, business owners are tempted to spend freely with their business credit cards, telling themselves that it’s okay because their expenses are tax-deductible. It’s important to remember, however, that tax-deductible expenses aren’t the same as free expenses. Deductible expenses can lower your tax liability, but you’ll still need to pay for the rest of your expenses past what you save with your taxes.
Basically, you don’t want your outflow to be greater than your income. If you see a pattern of overspending emerge, you need to pay careful attention to cutting back. Tax deductions don’t justify expenses that you can’t afford.
4. Using a business credit card for personal expenses
Setting up your company as a limited liability entity is a good way to minimize personal exposure in the event of financial troubles at your business. Your exposure can increase if you put personal expenses on a business credit card, however.
When you mix up business and personal funds, you run the risk of wasting the protections that you get by setting your business up as an LLC. In the event that your business is sued, the court will look at the way you mix business and personal expenses, and decide you aren’t eligible for LLC protections. In other words, the court could decide to pierce the corporate veil.
Once you set up an LLC, it’s important to follow every formality. You need a separate bank account and credit card for your business, and you need to make sure that all your business expenses go through that bank account and card. Even if you make a mistake at some point, and spend with your business credit card for personal expenses, you should reimburse your business. It’s important to maintain separation between business and personal expenses so that you legally continue to be a limited liability company.
Business credit cards often come with generous spending limits. As a small, cash-strapped business, it can be easy to get careless when you have access to plenty of funds. It’s important to pay attention to being responsible with your credit cards, however.