As a small business owner, you probably like to keep things simple. You’re forced to wear a lot of hats at your company, and you don’t have a lot of time to bother yourself with unnecessary items.
For these reasons — and possibly even more — you may think it’s OK to use your personal financial accounts to pay for business expenses. You likely already have a personal credit card, so why not just use it to fund purchases for your business?
Doing so might be easier for you, since it wouldn’t require you to go through the hassle of applying for a new credit card. It also may allow you to build extra points or rewards on the card you already have.
But using your personal credit card for business expenses has much more downside — and risks — than using a business credit card.
Here are five reasons you should use a business credit card and not a personal credit card for business expenses.
1. It Separates Business and Personal Expenses
From an accounting perspective, it’s very important to have quick and easy access to all of your business expenses. Mixing your business expenses with personal expenses makes that very hard to do. This isn’t just about making reporting quick and easy, although that’s certainly a major benefit. Come tax time, it’s essential that you (and the IRS) know exactly which expenses are for your business. By having a credit card specifically for business expenses, you’ll not only be eliminating what could be costly mistakes, you’ll be making it easier to reduce your overall tax liability.
2. It Improves Your Cash Flow
Every small business owner knows that cash is king — and cash flow helps a small business survive. Challenges can arise often with cash flow, though, which can put your business’ health in jeopardy. A few down weeks of collections could result in you having trouble making payroll, for example.
Having a business credit card gives you the financial flexibility you may need as a small business owner. Business credit cards also have much higher spending limits than personal credit cards, giving you access to the cash you need when you need it.
3. It Boosts Your Business Credit
Much like paying personal loans on time improves your personal credit, doing so with business loans will boost your business credit. Having a solid business credit rating can be very valuable over the long run.
As your business grows, you may need to make large equipment purchases, for example. If you don’t have a solid business credit score — or even a solid business credit history — then you may be forced to make these purchases with cash, or through high-interest loans.
One of the easiest ways for small business owners to build a solid credit history and score is through a business credit card. They are often much easier to acquire than other forms of business loans. Even if you start with a low credit limit, you can build your way up by charging purchases and paying them off on time.
4. It Helps You Control Expenses
Having a business credit card allows you to track your spending in real-time. As soon as you make a purchase, it shows up on your credit card summary online.
A business credit card also makes it very easy to see your business’ total spending liability. If you want to know how much you’re spending, simply check the total balance on your card.
In addition, a business credit card can allow you to more easily track employee expenses while they travel or are on the road. Depending on what card you get, you can issue additional cards to certain employees, and even set different spending limits by employee.
By forcing employees to pay for all expenses on the business credit card instead of submitting receipts for reimbursement, you’ll be keeping them honest while at the same time removing a mundane task from those who handle accounting.
5. It Gives You Extra Perks
Financial institutions are always fighting for new customers. One way they try to attract people to their credit cards is to offer perks.Business credit cards often offer significantly better rewards and perks than personal credit cards do, too.
Some of the most common perks are points or cash back on purchases. For example, you may earn a certain number of points or a percentage back on every purchase made on your business credit card. Even 2% back on every purchase can add up to a lot of money (It’s $20 for every $1,000 spent).
In addition to the ability to earn cash back or points with every purchase, some business credit cards offer discounts on shipping or business supplies. Travel cards may offer perks such as access to luxury lounges at airports, and free upgrades on flights or car rentals.
Some cards even provide extra rewards when you make purchases for advertising or marketing, which can help expose your business to an even wider potential audience.
These are just five of the many reasons why you should use a business credit card for business purchases rather than a personal credit card.
While your initial thoughts may be that using your personal credit for all of your expenses — business and otherwise — would be easier, in the long run, it will prove to be just the opposite. In fact, not only will having a separate business credit card streamline your accounting processes, it’ll make you less likely to make mistakes and, as a result, potentially less liable come tax time.