If you’re a small business owner or a sole proprietor, chances are you need to buy things for your business.
Whether you need a new laptop for your side hustle writing gigs or you’re on the hunt for some tools for your handyman business, using a credit card is often the most convenient way to make your purchase.
Now, if you already have personal credit cards in place, you might be wondering if you should use this to pay for your business expenses.
When You Might Need to Use a Personal Credit Card for Business
While it is perfectly possible, it’s also a bad idea for a number of reasons. A superior strategy is to get a dedicated business credit card to meet these expenses.
If you already have a personal credit card, there are a few reasons for using it occasionally to make a business purchase.
This is the most obvious reason for most people using a personal credit card to meet business expenses.
After all, you already use your card, so why not press it into action when you need something for your business?
Using your personal card also means you won’t need to go through the time-consuming process of applying for a business credit card and waiting for that card to arrive. This can be especially valuable if you’re a start-up looking to quickly scale.
You likely earn rewards of some kind with your personal credit card.
Using that card for business expenditure can skyrocket your rewards by increasing the amount you spend.
When It’s a Bad Idea to Use Your Personal Credit Card for Business
Though it might be tempting to whip out your personal credit card when you’re faced with business expenses, avoid this whenever possible. There are several factors that make this a bad move in most cases.
When you form a business or an LLC (limited liability company), one of the benefits is receiving personal liability protection.
If you have an LLC and find your business facing a lawsuit, you will normally be personally protected. None of your personal assets or funds will be at risk.
Having said that, you’ll need to separate your business and personal finances to make this happen. You’ll need separate bank accounts and separate records for you and for your business.
Break this separation, on the other hand, by using your personal card for business expenditure, and you’ll expose your personal assets and lose that valuable liability protection.
Whatever kind of bookkeeping system your business uses, you need some method of tracking revenue and expenditure. Without this, you won’t be able to predict profit and loss.
Good bookkeeping also comes into its own if you want to expand your business with a loan, or if you need help paying your business taxes.
If you use a personal credit card for business expenses, tracking becomes much harder.
Many business cards even boast features for easy integration with the most popular bookkeeping software.
Businesses have credit scores just like individuals.
Lenders will use these scores when deciding whether or not to offer finance, and at what interest rates.
Building a good credit score takes time. The most important factor in your score is a documented history of payments made on time.
To grow your business, you’ll likely need a loan at some point. The sooner you start building your business credit score, the more seamless the process of obtaining finance becomes.
When you mix business and personal spending on a single card, you could find out the credit limit is too low for comfort.
Since your personal credit card’s limit will not reflect business spending, you could find yourself using up too much of your limit. Your ratio of credit utilization is another key factor in credit scoring, so you won’t be doing yourself any favors if you go hard up to the limit of your card.
With a business card, by contrast, the credit limit should more accurately reflect your needs.
Beyond this, you’ll also keep your finances neatly separated while better controlling your spending power.
Not only will you have more money on hand to spend right now, by building your business credit, you’ll have access to more funding over time, further increasing your spending power.
Applying for a Business Credit Card
The application process for a business credit card is similar to that for a personal credit card.
You’ll usually have the option of completing an online application form just like the one you would fill in for a personal credit card.
You will, though, need to supply some details about your business. You’ll typically need to disclose your personal income along with the annual income and expenditure of your business.
Even if your business is not yet profitable, you can still apply for a business credit card. Card issuers are often prepared to issue cards to start-ups.
You’ll then have your business credit report checked along with your personal credit before the lender makes a decision.
If approved, your card should arrive in a week or so.
Business Credit Card Rewards
Business credit card offer rewards just like personal cards.
Most cards are focused on rewards relevant to business purchases. Rather than being slanted toward groceries and online shopping, you’re more likely to be rewarded for buying gas or office supplies.
Some reward programs, like the ones from American Express and Chase, allow you to combine points from business and personal cards.
Many business cards offer a large signup bonus, so you could consider this if you’re looking at a large purchase.
It might be easy and convenient to use your personal credit card for some business expenses, but it’s generally not a good idea.
You’ll expose your personal assets to business liability, and you’ll also reduce the ability to borrow money for your business in the future.
It’s not much tougher to apply for a business credit card than a personal credit card, and you’ll start building good business credit, too.