As a business owner, you have to balance revenue against your business expenses, especially if you’re scaling up. One way to increase cash flow amid your regular and one-time costs is by using a credit card.
But it’s important to select your card carefully – including determining whether you prefer a personal or business card.
What Are Business Expenses?
According to the IRS, business expenses are those that are “ordinary and necessary.” To qualify under this umbrella, your expenses must be both “common and accepted” and “helpful and appropriate” in your trade or business.
Tracking your various business expenses isn’t just a good habit – it can also produce substantial tax savings. Many expenses are partially or fully deductible, including:
- Basic office supplies
- Payroll for employees and freelance contractors
- Bank and credit card fees and interest
- Rent and utilities
- Subscriptions and membership dues
- Equipment purchases and leases
- Maintenance and repair
- Travel expenses
- And legal fees
You can further break down expenses by whether they’re fixed (unchanging) like rent, variable (changing) like payroll or gas, and periodic (infrequent) like major repairs.
How Does Paying Business Expenses With a Credit Card Work?
Paying business expenses with a credit card works just like using a personal credit card. After being approved, you make regular purchases against your credit line. Once you pay your credit card bill, you can make more purchases.
Using a credit card for your business can help smooth over your finances and increase cash flow potential. Plus, many offer specific perks and advantages designed with business owners in mind.
That said, you do have a crucial choice to make. While you can use a business card designed for businesses, you can also use a personal card for to pay your bills.
Can I Use My Personal Credit Card To Pay My Business Expenses?
Yes, you absolutely can use a personal card to cover business expenses, though they may have unique advantages or disadvantages. That said, it’s unwise to mix personal and business expenses on the same card.
Does Paying Business Bills With a Credit Card Help To Increase Cash Flow?
Deferring payments onto your credit card can help increase cash flow by spreading out your expenses. And if you pay your bills in full every month, you won’t owe interest on your credit card bill!
However, it’s important not to spend more than you can repay in a reasonable timeframe. While paying interest may be necessary occasionally (especially early on), never charge to your card more than you can realistically afford.
What if a Vendor Doesn’t Accept Credit Card Payments?
In the modern age, most vendors accept credit cards – but not all. If you’re worried about how to pay vendors, an online bill paying service may provide a solution.
Companies like Stripe, PayPal, Prism, and Square simplify the tracking and bill paying process. But do your research: while some charge low or no fees, others become costly quickly.
Differences Between Personal and Business Credit Cards
For the most part, personal and business credit cards function the same way. You make charges against your revolving credit line, pay off your balance, and spend again. However, you should remember these key differences.
Credit Score
Did you know that your business has a credit score, just like you do?
When you take out a business credit card, the issuers report your activity to commercial credit bureaus to establish your company’s credit history. Doing so makes it easier to qualify for other debts later.
Unless you fall delinquent on your business cards, your business activities usually won’t show up on your personal credit score. That’s both good and bad: while your business debts won’t drag down your score, you won’t benefit from on-time payments, either.
Business Related Benefits and Rewards
Just like personal cards, business reward cards offer cashback, points, or miles in “bonus” categories. What changes is where you earn points.
Consumer cards often offer cashback in categories like groceries, dining out, and online shopping. Business cards tend to gear points toward business-y activities like office supplies and travel.
But if a personal card offers rewards in categories you use more, you’re not out of luck – many issuers offer the same cards in both business and personal varieties. You may even find that the same card, business-style, comes with better welcome bonuses.
Either way, the key is to take advantage of the cards and perks that benefit your bottom line most.
Protection
While business cards may grant better perks, consumer cards often have better user protections. Specifically, the Credit Card Accountability Responsibility and Disclosure Act of 2009 regulates interest rate hikes and fees for consumers.
Unfortunately, many of those same protections don’t apply to business cards.
Credit Limits
Another perk of business-specific cards is the credit limit.
As a business owner, credit card issuers will consider both your personal income and business revenue when determining your credit limit. Even if you don’t have tons of expenses now, more spending power boosts your financial flexibility.
Potential Risks of Mixing Credit Lines
Many business owners find themselves using personal credit cards to pay vendors or cover other business expenses. While that’s perfectly legal, it can also come with a few complications.
- Tax Issues: Separating your business and personal use cards ensures that if the IRS comes a-knocking, you can prove that your charges really were business-related. Plus, it’s easier to calculate interest on business expenses if you don’t have to weed out personal charges.
- Accounting Issues: When you mix accounts, it’s easy to lose business transactions amongst the personal charges. Doing so means you might lose valuable tax deductions or forget to bill clients.
- Violating Card Agreements: Many business cards limit your use to business expenses only. Using the card for personal charges could violate the card’s Terms of Service, resulting in a closed account.
- Legal Issues: Separating business and personal expenses allows you to maintain the legal protections that your corporation or LLC provides. Crossing that invisible boundary can open your personal assets up to claims if you’re sued.
Business Expenses and Credit Card Bills: A Common Mix
Using credit cards for business expenses can boost your spending power and offer perks like cashback and a positive business credit score. Still, be wary of mixing business and pleasure – especially when it comes to your finances.
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