Yes, you can use a personal credit card for business expenses. Small businesses and startups often run out of cash and fail to secure needed liquidity fast enough to cover their short-term financial obligations. In conditions like these, a personal credit card proves to be an exceptional source of credit to cover some of your business expenses before you can secure a small business loan. Even if business credit cards are tailored to businesses, they still operate the same way as consumer credit cards. That is why many business owners small or large use them interchangeably for business and personal use.
Although this practice is not illegal, mixing your business finances with your personal finances can be risky for you and the business. By mixing your business and personal life, you automatically weaken the protection you established with your business structure such as LLC or corporation. For example, if you default on your business credit card debt, your bank can come after your business and personal assets due to the lack of separation between the two sides. Furthermore, it becomes difficult to track your business expenses which end up costing you money in terms of tax credits and deductions.
What is a business credit card?
A business credit card is a credit card tailored for a business owner. Whether you are a small business owner such as a proprietorship, LLC, or corporation, you can still apply for a business credit card. With a business credit card, you make business purchases such as office supplies, pay for utilities, or simply cover other expenses such as business campaigns.
In order to qualify for a business credit card, you first need to have a business. Some businesses prohibit cardholders from using their business credit cards for personal use, according to Forbes. Having a distinction between your business and personal life is a critical business practice. Just like consumer credit cards, business credit cards come with rewards for qualifying purchases and other forms of benefits and features. For example, a business cash-back card might give you discounts or cash back on some business expenses such as office supplies.
Can you use a personal credit card for business expenses?
Yes, you can use a personal credit card to cover business expenses. This is a common practice for many business owners with limited resources. For example, startups and small businesses do not have all the liquidity needed to cover their short-term financial obligations. In this case, owners of these businesses choose to put some of their business expenses on personal credit cards.
This practice, however, does not help in terms of building business credit. It also poses further business challenges moving forward. Yes, your credit card issuer will not penalize you for using a personal credit card to cover business expenses. The bank will also not care about what expense your credit card was used for. What matters is that you have made a successful transaction based on the terms of the credit card.
When it comes to legal purposes, however, mixing your personal expenses with business expenses poses a major challenge. Most business owners seek the protection of their businesses by forming LLCs and corporations. By making business purchases with your personal credit card, you automatically put that protection in jeopardy. In order words, it becomes difficult to separate your personal assets from your business’s. As a result, you might end up losing your personal assets in a lawsuit or when the bank comes after you due to a default.
The benefits of using a personal credit card to cover business expenses
For many startups and small businesses, personal credit cards offer quick and direct access to much-needed cash. Personal credit cards also may come with lower interest rates, less annual fees, higher rewards, and better features. If your business is running low on cash, a personal credit card can easily solve some of your short-term financial obligations before you get your hands on cash. Instead of getting a short-term small business loan, your personal credit card can fill in the gap.
Higher rewards on qualifying purchases such as office supplies and furniture also come in handy your cash reserve is dry.
Drawbacks of using a personal credit card on business expenses
Although you can use a personal credit card to cover your business expenses and vice-versa; it is not a good business habit. By doing so, you end up putting your business and personal life in situations that can prove costly later on. The following are some of the reasons why it is not a good idea to use your consumer credit card to cover business expenses.
1. It becomes harder to track your business expenses
One of the best ways business ensures business tax credits is through deductions on their business expenses. When you put your business expenses on a personal credit card, it becomes difficult to track your business expenses. You cannot tell what expense went for personal use and what was used for business. Some of the expenses could be obvious such as large office furniture. But other expenses such as a lunch or dinner could prove impossible to track.
If you cannot separate your personal expenses from business expenses, you cannot legally claim them as business expenses on your tax returns. As a result, you will lose tax deductions due to using a personal credit card for business expenses.
2. You cannot build a business credit
Business credit cards are tailored for business activities. All activities on these credit cards help you build business credit which can help you qualify for more business loans or even personal loans. When you mix business expenses and personal expenses on a consumer credit card, you lose the chance to build a business credit history.
3. You weaken your legal protection
Depending on the type of business you formed, you can be fully liable, partially liable, or not liable in a court of law when your business is sued. For example, if you have a corporation and end up in default the business will be liable and all business assets might be liquidated to cover your business’s financial obligation. But, the bank will not come after your own personal assets to settle the matter. Other forms of businesses such as limited liability corporations (LLCs) can also offer some forms of protection against lawsuits.
In order for these protections to work, you must have a clear separation between your personal life and finances with your businesses. In order words, you need to have a business credit card, business bank accounts, different bookkeeping, etc. There should not be any direct relationship between your personal finances and your business finances.
When you use a personal credit card for business expenses you automatically weaken your legal protection. This is also the same when you use your business credit card to cover your personal expenses. For example, some small business owners use their personal credit cards for airline tickets and then claim those tickets as business expenses. This strategy sounds like a clever way to get more deductions, but it is risky.
If your business gets into legal battles, it will be harder to separate you and the business. As a result, you could easily lose your personal assets.
4. You cannot easily track your employees’ business expenses
Most credit card issuers allow employers to add their employees to their business credit cards. That is each employee or department will have a different credit card that allows them to make business purchases. For example, if you have different departments where they make unrelated purchases, it would be wise to have one credit card for each department or employee. You don’t want your social media manager to borrow your business credit card to pay for a campaign. And later, maintenance personnel borrows the same card to buy drainage equipment.
By setting up different credit cards for your employees, you can easily track their expenses. It is also easy to limit how much each employee can spend on each credit card without giving them full access to your entire credit card limit.
5. You miss out on business rewards
Each business credit card comes with its own rewards category. Your points business credit card will benefit you only if you use your business credit card for business expenses. The same applies to other features that come with business credit cards.
For example, if you use your personal credit card for business expenses such as office supplies, you will not get those rewards. This is because you would have used the wrong credit card for the purchase. In case your personal credit card gives you rewards for buying such products, you will earn what your consumer credit card gives you. But, you will not get any business rewards. Before using your credit cards randomly, be aware of what you are going to purchase and use the right credit card for it.
Other business credit cards might give you discounts on online campaigns and other programs. By using your own credit cards, you automatically disqualify for these benefits.
Can I use a business credit card for personal expenses?
There are times when you will need extra cash to cover your personal expenses. Having a business credit card can help you meet your personal financial needs. But it is not a good idea to do so. Some credit card issuers also prohibit using a business credit card for personal use. The terms and conditions of use of each business credit card vary from one card to another. Make sure that you read all rules that govern your business credit card before using it for personal expenses. As I mentioned above, you can use your personal credit card for business expenses. The same applies to business credit cards for personal expenses.
For example, if you are going on vacation, you can book an airline ticket using a business credit card. This is done on a regular basis. It is like any other expense on your credit card. What you need to keep in mind is that you cannot claim this expense as a business expense when filing taxes.
This practice also triggers other disadvantages for business credit card practices. Mixing your personal expenses with business expenses is never a good idea. Although you are not planning to be sued, anything can happen at any time. By separating your own expenses from business expenses, you get to have extra legal protection, should you need it.
How to properly use a business credit card?
Business credit cards are similar to normal credit cards. The big difference is that many credit card issuers do not report business credit card activities to three major credit reporting bureaus(TransUnion, Equifax, and Experian). Others report your activities when you are violating the terms of your credit card such as falling behind on your payments.
Even if your credit card issuer might not report your activities, you still need to follow the best credit card practices. That is you must use your business credit card wisely and pay off your balances on time. In addition, you need to maintain a low utilization rate on your business credit card. This will help you keep a positive record with the card and allow you to increase your credit limit or easily qualify for a business loan.
It is also a good idea to watch how much you spend on a credit card. Just like consumer credit cards, spending more of your credit limit on a business credit card is risky. At the end of the day, the balance on the card must be paid off with interest(in case you carry your balances). You don’t want to accumulate a lot of credit card debts on your business card.
Finally, having a business credit card means that you have a business. It is wise to separate your business credit card expenses from personal expenses. Even if it makes sense to just swipe the card, the result can be devastating for you and your business. Always keep your business accounts and finances completely separate from your personal finances. Not only that this practice will protect your business, but it will also keep your personal assets’ legal protection intact.
