Although the majority of credit cards in circulation are for consumers, the popularity of business credit cards is on the upswing.
According to a 2018 report by the Mercator Advisory Group, the purchase volume of business credit cards is expected to go from $493 billion in 2017 to $686 billion in 2022. Some small business owners who previously used personal credit cards for business expenses are moving to business credit cards.
One of the attractions is that credit cards designed for businesses offer specialized account controls and the ability to create custom reports. These kinds of management tools just aren’t available on consumer credit cards.
But if you do decide to start using a business credit card, there are a few things that you should never, ever buy with that card.
Travel expenses that get personal. A few months ago, I went to a finance conference in Orlando, Florida. I tacked a vacation day on to the trip and stayed one more night in a very nice hotel. I carefully divided my expenses between my business card and my personal credit card.
It’s important to pay for your own entertainment for ethical reasons, obviously. But doing the right thing also saves you time when it’s tax season. If you run a small business, your business credit card offers you fancy reporting tools for employee expenses, taxes and more.
So don’t make things hard on yourself. You do not want to have to spend time combing through a year of credit card statements to pull out your personal stuff.
And another good reason? If you ever need to apply for a business loan, potential lenders will want to review your financial records. It might make you look a little shady if you have your trip to a class reunion in the Bahamas intermingled with your business expenses.
Cash advances. There’s no reason in the world to get a cash advance on your business credit card. Your annual percentage rate for a cash advance is almost always higher than your purchase APR. In fact, your cash advance APR often exceeds 25 percent, and it comes with no grace period, which means interest starts accruing right away.
Oh, there’s also a 5 percent transaction fee on the amount borrowed. See what I mean? A cash advance is an expensive solution.
But do take a minute and examine the reason you were even considering this. Are you in desperate need of more capital for your business expenses? Research other options. Check out loans from your bank or from the Small Business Administration.
High-cost purchases. I will concede that there’s one situation where this would be OK. Let’s say you stand to earn a ton of rewards if you use your business credit card for this purchase. Let’s also say that you have the cash to pay the bill in full when it shows up. In that case, and as long as you aren’t applying for a new round of venture capital within the next six months, then go ahead.
But most of the time it’s best not to do this even if it’s a legitimate business expense. Your utilization ratio shoots up, and that’s bad for your credit score. And if you start carrying a balance, you’ll get into debt quickly. Remember, most business credit cards require a personal guarantee, so your business card activity could be reported on your credit report.
With a business credit card, you have to be on the alert for sudden interest rate increases, which would make your debt situation much worse. Consumer cards are covered by the Credit CARD Act of 2009, which offers protection against practices such as sudden rate increases. But this legislation doesn’t cover business credit cards.
Legal entanglements. If you’re paying for a legal consultation about an aspect of your business, that’s fine. But if you’re being sued, use a different strategy for paying the legal bills.
The reason? Credit card issuers will worry that your business is shaky if you charge your legal expenses. And if you need to seek funding in the future, this could highlight a problem area that potential lenders might focus on.
Try to work out some sort of payment plan that your company can pay from cash flow while the lawyers are doing their thing. Hopefully, this will pass, whether via a reasonable settlement or maybe even being dismissed altogether.
But in the meantime, don’t risk signaling to the financial world that you’re in legal trouble and about to go under. Be sure you use your business card for the right things, and you’ll reap the benefits that business credit cards offer.