Most experts agree that business owners should use a business credit card, rather than their personal card, for business expenses. Yet many small business owners continue to use their personal credit cards for business-related spending.
Perhaps applying for a business credit card just hasn’t topped their long list of priorities. Maybe they’re even enjoying how the additional business spending boosts their personal points balance.
Sound familiar? If so, consider whether the convenience of using your personal card — even racking up extra points — is worth the risk of an unfavorable IRS audit or ruining your personal credit history.
Using a business credit card for your small business not only protects you from these risks but also offers other benefits like assisting with cash flow and increasing your purchasing power.
And, yes, you can even earn points and other rewards for your business. In fact, business credit cards usually offer larger sign-up bonuses than their consumer counterparts and often include perks geared toward business travelers, like airport lounge access.
Read on to better understand why you and your business are safer when you separate your business and personal spending — and how you can enjoy further benefits from getting a business credit card.
When you use a dedicated business credit card, you separate both your spending and your credit history from your personal credit. Why is this important? Two reasons.
Providing Audit Safety — by Separating Your Spending
Have you ever used your personal rewards card to book a business flight? Or taken out an essential client for an expensive dinner? Even if you keep meticulous track of your expenses, mixing your business and personal spending will undoubtedly complicate your life come tax season. Plus, mistakes can cost you dearly.
You could forget valuable tax write-offs, or even inadvertently include a personal expense as a business deduction. And if you get audited by the IRS, that second possibility would mean you not only owe more taxes but also could face civil or criminal charges, says business owner and accountant Gene Marks. Using a dedicated business credit card for all of your business expenses insulates you from these risks by keeping your business spending separate from your personal spending.
Protecting Your Credit Score — by Separating Your Credit History
Small business credit cards generally don’t report to the three major consumer credit bureaus unless an account is in default, according to John Ulzheimer, a credit expert who worked for a credit bureau and a credit scoring company. He can’t say the same for consumer credit cards.
Remember those extra rewards points you may have racked up by using your personal card for business expenses? Those are the result of spending more than you otherwise would with your personal card.
But, when you do so, you’re also getting closer to reaching your credit limit. Why is this a problem? Using more than 30% of your credit limit typically drives down your credit score. So, while you may be earning a higher number of points, you also may be lowering your personal credit score. This means that you’re not only less likely to qualify for credit, but you also may get charged higher interest rates.
Beyond protecting your personal finances, getting a dedicated business credit card can also help your business in several other ways, including:
- Increasing your purchasing power. Business cards often provide higher credit limits than personal cards. Some even allow credit limit leeway for business owners who call ahead of time about a larger-than-usual purchase.
- Simplifying your accounting. Business card issuers can provide spending statements broken down by user-defined categories, which can simplify your accounting processes. The reports even sync with most small business accounting software, making it easier to complete your tax returns.
- Assisting with cash flow. Late-paying clients or unexpected expenses can wreak havoc on your cash flow. Putting an expense on a credit card can alleviate the related burden on you because you get the rest of the billing cycle to make your payment. Plus, business credit card issuers sometimes allow up to a 10-day extension of your grace period when requested — a courtesy that’s rarely offered on consumer cards.
- Improving your potential for earning rewards. Not only do business credit cards often offer higher sign-up bonuses, but many also allow you to earn points at a higher rate than you would with a consumer card.
