Using a credit card for business purposes has many advantages. You can manage the payment of bills and at the same time improve your company’s purchasing power. Furthermore, a business credit card helps keep your business and personal expenses separate, which is important when calculating deductions for business-related expenses. It also minimizes your risk of being flagged for an audit by the IRS if it appears that personal expenses are being paid with corporate funds.
On the other hand, using a credit card for business expenses can be a bit more costly and carries some risk.
Here are some of the advantages of using a credit card for your business:
- Flexibility. You can pay monthly bills and have the ability to purchase equipment or other capital needs without worrying about cash flow. If revenue is lean one month, making the payments on a credit card allows those bills to be paid timely. This is especially true if a large purchase needs to be made during same time that other expenses are rolling in.
- Improve credit. Relatedly, the more you use the credit card and make regular payments on that card, you establish a credit history for your business and your overall credit improves. Having separate credit cards for your personal use and business use further expands your potential credit for your business and your family.
- Options for more lines of credit. Many business credit cards offer expanded credit beyond the limits of the card and others offer rewards programs that provide cash back, travel perks and other incentives.
- Keeps personal and business separate. This is important. By maintaining a business credit card, this reduces the risk of comingling personal and business expenditures. This is particularly important because only business-related expenses are deductible on a business tax return or Schedule C. By keeping those purchases separate, it is easier to identify business-related expenses and therefore claim all the deductions you are entitled to. As stated above, this also protects you and your business from being flagged for an audit if the IRS suspects that personal expenses are being paid out of business accounts.
- Security. If you need to delegate some financial duties to certain employees, a business credit card is a way to give them limited purchasing power. Check for those cards that allow you to set and adjust individual spending limits and alert you for every purchase.
As with most things, there is some risk with the reward.
- High fees. Business credit cards usually carry higher interest rates than other lines of credit. If not repaid on time, this can add up to a large amount, so it’s imperative that the balances are satisfied each month. Interest rates on the cards can also fluctuate. Finally, some cards require an annual fee.
- Personal liability. Many business cards will require the cardholder to personally guarantee that the debt will be repaid. Again, it is important that when using a business credit card to treat it as a monthly bill no different than a utility bill.
- Security. While business credit cards can make it easier to give certain employees the ability to make purchases on behalf of the company, it is imperative that you establish measures to ensure that the card and/or the card information is not stolen by employees, vendors or anyone else who comes through the office.
Remember, our Back Office Solutions Team can handle payment of all your monthly bills, which takes that burden away from you and frees you up to handle the business of running your business. Please let us know if you have any questions, and we can have a member of our BOS team or your tax adviser walk you through the best practices for using a business credit card.