Business expenses need to be documented, so you can’t simply pay cash for them. You could, but the IRS won’t recognize them as deductions if you get audited. Credit cards are better for business expenses. They give you documentation of the transaction and a receipt for your records.
You don’t have to use a “business” credit card, though. There’s nothing wrong with using a personal credit card for your business expenses—many business owners prefer it. If you’d rather use your personal card for business, there are some important things to consider.
Consideration #1: Taking on too much personal debt
You’ll never be debt-free if you use a personal credit card for business expenses. There’s always a need to spend more because a business consumes resources and requires marketing and promotion. Your personal debt will continue to go up and down with this system.
Don’t use a debit card. Gas stations, hotels, and other service businesses place a hold on your card that is sometimes several hundred dollars when you use their services. This can easily max out a debit card, which could limit your available cash flow.
Consideration #2: Your credit utilization ratio
Making large purchases with your personal credit card will increase your credit utilization ratio, one of the variables used to calculate your credit score. High credit usage—or, using a high percentage of your available credit—can hurt your score. With a business, large purchases are common, so you can expect your credit score to go down if you’re using your personal card for everything.
For best results, apply for a second personal credit card when you open your business. That will increase your total available credit and help bring down your credit utilization ratio. This is a good way to keep your credit score intact when your spending goes up.
Consideration #3: Keeping personal and business expenses separate
This is a trap that many small business owners fall into. If you’re going to use a personal credit card for business, make sure it’s a separate card from the one you use for personal expenses. This is also another way to prove they are business expenses if you get audited.
Keep good records. Save receipts and make notes so you can answer questions about expenses if the auditors ever come for a visit. There will be fewer questions if you separate business and personal expenses by using different credit cards for each.
Consideration #4: Pay your monthly balance in full
Another way to keep your credit utilization down is to pay off your full balance every month. This will also save you on interest charges. If you only pay off a portion each month, you’ll owe interest on the remaining balance. Zeroing the balance out eliminates interest and saves you money.
If you’re working on a system where you’re getting reimbursed for business expenses, pay the bill as soon as the reimbursement comes in, and save a record of the payment as soon as you make it. Those expenses may not be deductible for you if someone else is taking them.
Consideration #5: Choose a rewards program that fits your business
One of the best benefits of using a personal credit card for business expenses is that personal cards typically offer better rewards programs. If you travel a lot, apply for a travel card. If spending volume is high at one store, get a card from that store.
Some credit cards offer a cash-back program. Compare the rates, but don’t make your decision based solely on the cash-back percentage. Other cards may have miles or redeemable points that could be more valuable to your business. Do some research and find the best match.
