Using a business credit card to manage daily expenses can be a great way to keep expenses together, build a margin into your cash flow, and earn valuable rewards on purchases you're already making. But if you're not putting in the forethought to do your research and set strict boundaries around your business credit card spending, this helpful financial tool can quickly become a liability for your business.
Protect your profit margins by making sure you avoid these top six common mistakes with your business credit card.
1. Choosing the Wrong Type of Credit Card
First things first, it's important to note that not all credit cards are created equal. Business credit cards and personal credit cards are different products that carry different legal protections and have a different impact on your credit score.
If you're hoping to build business credit so that you can seek other forms of financing in the future, using a personal credit card to manage your business spending won't help you achieve that goal.
At the same time, personal credit cards carry a higher level of consumer protection from a legal standpoint. There are more government imposed regulations on interest rates, terms, and the like. Some business owners--particularly sole proprietorships--opt to use a personal credit card for business for this reason, but you're probably better off sticking to the business card while carefully reading the fine print.
2. Mixing Business and Personal Expenses
It's the very first piece of advice any bookkeeper, accountant, or veteran business owner will give you--but it bears repeating: you have to keep your business and personal spending separate. Failing to do so is a recipe for a headache come tax time, not to mention the potential for increased scrutiny from the IRS.
Even for business owners who know this mantra well, the temptation to mix business and personal spending can get especially tricky when it comes to your credit card. You open your wallet at the grocery store, and somehow you only have that business card on hand. You place an online order for office supplies, and it's just too easy to use the personal card information that's already filled in--promising to reimburse yourself later.
One or two of these mix-ups turns into 10, and next thing you know--you're on a three-hour call with your bookkeeper, going line by line through every credit card statement.
You definitely don't want to go there.
3. Spending Without a Plan
When you're first getting started with a small business--particularly with a shiny new high limit business credit card in hand--it's easy for every potential expense to feel like an absolute need.
You need that state of the art piece of equipment (and couldn't possibly pick up a used substitute).
You need to treat that prospective client to a fancy five-star dinner. Dom Perignon, anyone?
There's nothing wrong with investing in your business in a smart, systematic way. But if you're busting out that business credit card day after day without a budget, a repayment plan, or any forethought about the return on your investment, you're setting yourself up for trouble ahead.
Even if you've found an introductory business credit card offer that gives you 0% APR, make sure you're paying attention to when that interest will kick in so that you can plan for full repayment before it starts catching up with you.
4. Ignoring Interest Rate Changes
If you've shopped around, done your homework, and you have a decent personal credit score going in--chances are you should be able to find a business credit card that offers 0% APR to start, usually for somewhere between six and nine months.
Now that kind of introductory offer can be a huge benefit for business owners, especially when you're just getting started and need a little working capital boost for those early days expenses.
But there's a catch. This opportunity only works if you're paying strict attention to the fine print--because the moment that introductory period ends, your interest rate will typically skyrocket up to at least 18 to 20 percent (and very often higher). When that happens, if you're sitting on a massive credit card balance, you'll be looking at a mountain of interest expenses.
And don't think you can just game the system, either. These introductory offers almost never apply to balance transfers from one card to another--so hopping from card to card keep your rates low isn't an option.
5. Getting Behind on Payments
Of course, all these warnings about overspending and paying attention to your introductory offer dates all come down to this one fatal flaw--getting behind on your business credit card payments.
It's a mistake that sounds so obvious in the abstract, but when you get down to the day to day of running your business, it happens way too easily.
You missed the email saying that your payment is due, or have an unexpected expense that takes priority. But even one late payment on your business credit card can have a devastating impact on your business and personal credit scores--and ultimately your long-term financing options.
Take the time to create a budget and a cash flow forecast, add payment reminders to your calendar, and if you're working with a team, make it clear who is responsible for making payments on time, every time.
Still worried that a late payment might negatively impact your business? Go ahead and set up automatic payments through your credit card provider, and maintain a minimum balance in your bank account to cover it.
6. Taking the Wrong Approach to Business Credit Card Rewards
Different business credit cards offer a wide array of awards opportunities for their customers that can save you money, make that entrepreneurial lifestyle a little more enjoyable, or both. But if you're not using them correctly, business credit card rewards can hurt you a lot more than they help.
Among small business owner, misuse of business credit card rewards tends to fall at either side of a long spectrum. Either they're totally ignoring the potential savings from rewards like cash back or discounts on certain purchases (and thereby leaving money on the table), or we'll see the opposite extreme.
Yes, rewards points and cashback are nice perks, but they're not a Carte Blanche for excessive spending. Those extra airline levels are not worth the value of a thousand dollar dinner for two.
To get the most mileage--literally or figuratively--out of your business credit card, approach rewards the same way you would any business transaction. Run the numbers, measure the returns, and look for the business credit card with the best combination of favorable interest rates, terms, and rewards that actually make sense for your business.