Business credit cards can make it much easier to manage a company, and this is true for business owners with employees as well as solo entrepreneurs. After all, business credit cards help you separate business and personal expenses for accounting purposes, and can also help you stay organized when it’s time to file taxes. What’s more, the best business credit cards offer rewards and perks that can easily cost thousands of dollars a year.
However, there are some things you should never charge business credit cards under any circumstances. There are several reasons for this, including the fact that business cards operate on a different set of rules than personal cards. For business plastic, the protections of the Credit Card Act of 2009 do not automatically apply.
With that in mind, you need to know what you should and shouldn’t charge a business card before you run into problems. This guide explains the basic expenses you should refrain from using your business card, as well as the consequences you may face if you don’t.
1. Personal expenses
Putting personal expenses on a business credit card isn’t illegal, but that doesn’t mean you should. After all, consumer credit cards come with the protections provided by the Card Law that you don’t get with corporate credit cards. Thus, the use of a business card for personal expenses means a complete loss of this protection.
Not only that, but using a business card for personal expenses can make accounting and taxation much more difficult. In addition, there are many credit cards that consumers can choose from, so there is no reason to mix personal and business expenses on the same card.
What happens if you use a corporate credit card for personal expenses? You can overcomplicate your finances and forfeit important consumer protections.
2. Expensive items or expenses that take months (or years) to pay off
You need a high-value item for your business and you have enough credit on your business credit card. All things considered, it might be tempting to pull that plastic out.
But credit cards are not always the cheapest loan. Currently, the average business card interest rate is 16.07 percent, lower than the national credit card average of 18.16 percent, but still potentially higher than the annual interest rate on a loan. Annual interest rates matter whether you’re going to carry a balance for a couple of months or a couple of years.
With that in mind, you’ll want to take a closer look before you buy. Can you get a small business or personal loan at a lower interest rate? Or can you open a business credit account with a merchant or set aside money until you can afford to charge for an item and pay for it at the end of the month?
Of course, you can also look into business cards that offer 0 percent APR on purchases for a limited time. Whatever you do, don’t charge sky-high expenses without a plan.
What happens if you carry a balance on a business credit card for a long time? You will pay much more interest than you should, and your expenses will cost much more than they originally cost.
Just because you’re on a business trip doesn’t mean all expenses are charged to your business credit card. For example, entertaining clients is a legitimate expense within the limit, but getting a new tattoo while on a business trip is definitely not.
If you do not understand what is and what is not business expenses, you should talk to your accountant before you start making questionable allegations. The Internal Revenue Service (IRS) also offers several online resources to help you weed out real business expenses from items you can’t deduct on your tax return.
What happens if you write off travel expenses from a business card? You can create problems for your business at the IRS, and nobody wants that.
4. Salary
Placing a payroll on your card is not something you want to do, mainly because interest payments will significantly increase your employees’ payroll costs. And if you’re forced to charge your credit card payroll due to cash flow issues, it’s a sign that it’s time to rethink your business plan.
If you need a less expensive way to finance your payroll, you can also take out a small business line of credit from your bank or credit union. Interest rates for small business lines of credit vary, but they often range from a few points above the base rate and up. If you qualify, a short-term loan may be a less expensive option than your credit cards.
What happens if you charge wages to your business credit card? If you don’t pay off the balance right away, you’re likely to pay sky-high interest until you can.
5. Judicial calculations
Charging legal fees signals to card issuers that your business is under severe stress, and card issuers are questioning your ability to pay them off. Also, if it’s more money than you can pay out of pocket, that means you’ll be adding credit card interest to the tab.
If you owe a legal settlement that you cannot afford, it makes sense to explore other small business financing options that may be less costly in the long run. Examples include small business loans and small business lines of credit, both of which can have lower rates than most business cards offer.
What happens if you remove a legal settlement from your business credit card? You may spend too much time paying it back, and at rates that are higher than you might be paying elsewhere.
6. Cryptocurrency and other high-risk investments
A number of card issuers have banned fees for buying cryptocurrencies, but a quick web search will give you more than a few results with options for placing cryptocurrencies on your credit card. But even if you can charge cryptocurrencies from your card, that doesn’t mean you should. You are trying to increase your business capital, so do not use a credit card as a source of cash.
Keep in mind that investments can go up or down and you will have to pay a transaction fee. And this is a recipe for a lot of high-interest debt.
What happens if you write off cryptocurrency or other investments from a business card? You may pay transaction fees and sky-high interest only for your investment to end up losing money.
7. Cash advances
Our tips for issuing cash from business cards are the same as for personal cards. You should never use a credit card to withdraw cash unless you have no other choice, and you should be hesitant even then.
Depending on how often you do this, how much you charge, and how long you wait to pay it off, it can be scary for potential card issuers and lenders. And it may prompt your current card issuer to raise your interest rate, reduce your line of credit, or close your account.
Also, getting a cash advance means you won’t have a grace period. This means that you start paying interest the moment the money comes out of the ATM.
What happens if you use a business credit card to dispense cash? You will pay a cash withdrawal fee and a higher annual interest rate on the amount of the cash withdrawal. You also won’t have a grace period, so interest will start accruing that day.
bottom line
Business credit cards can make paying for business expenses much more convenient, and the best ones offer valuable rewards and perks well worth the cost of entry. However, you should only use business cards for legitimate business purchases and only when you have a plan to pay off the balance.
Editorial disclaimer
The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
