From excessive client entertainment to payroll, there are some expenses you should not charge on your business credit card.
From high-dollar buys that can languish on your company’s card bill to payroll and legal settlements, not all business expenses belong on the business cards.
If you run a small business, you’re probably familiar with business credit cards. They often offer business-oriented rewards and perks, coupled with rates that are frequently lower than that of the average personal credit card.
And more than one-third of small businesses used credit cards to meet their capital needs at some point in the last year, according to a forthcoming 2020 report by the National Small Business Association.
With business cards:
- Issuers can raise rates and lower credit lines at the first sign of financial stress.
- There isn’t a mandatory cap for late fees.
- Over-limit fees are allowed.
- If you pay late or default on a business card, it could end up on your personal credit history.
All of this means that smart business owners are very careful with business credit.
“You have to have a budget,” says Steve Strauss, author of “The Small Business Bible.” “And you have to make sure your expenses are within your budget.”
Whether you’re running a one-person shop or a burgeoning small company, here are eight expenses you don’t want to charge on your business credit card:
9 items smart business owners don’t put on their business credit cards
1. Personal spending
It is not illegal to put personal expenses on a business credit card. But that doesn’t necessarily mean you should.
“Consumer credit cards are subject to the CARD Act, which gives consumers significant rights and protections. Business credit cards are not subject to the CARD Act,” says Angela K. Littwin, law professor at the University of Texas at Austin. “Putting personal expenses on a business card would cause the debtor to lose those protections.
“It may violate [your own] company policy – and possibly the card issuer agreement,” says Littwin.
2. High-dollar items
You need a high-ticket item for the business, and you have enough room on your business credit card. It can be tempting to whip out that plastic.
But credit cards aren’t always your least expensive loan. Currently, the average interest rate on a business card stands at 14.03% – lower than the national average credit card APR of 16.12%, but still potentially higher than a loan’s APR. APRs matter if you’re going to carry the balance for a couple of months.
“You might be paying a lot more interest” than necessary, says Strauss.
Shop your options 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 the vendor or put aside money until you can afford to charge the item and pay it off at the end of the month?
One of the common traits among budding business owners and entrepreneurs is over-optimism over how much they’ll make and the debt they’ll be able to shoulder, says Krista Tuomi, a professor at American University and expert on entrepreneurial finance.
“Don’t put anything on the card you can’t pay off almost immediately,” Tuomi advices.
3. Business trip extras
Just because you’re on a business trip doesn’t mean every expense belongs on your business credit card. Just use the same common sense you would at home, says Strauss.
Entertaining clients is a legitimate expense, within limits. A mani-pedi during a business trip: probably not.
New businesses often need business loans, and microlenders and peer-to-peer lenders are becoming more common, says Tuomi. “They are going to look at everything. And they’re not constrained at looking at just if you’ve paid on time.”
When in doubt, do the “mom test,” says Tuomi. Is this a charge you would want to tell your mom or grandmother about? If not, either skip it or pull out the personal credit card.
Putting payroll on your card is not a move you want to make. “It’s a symptom of running out of money,” says Paul Downs, author of “Boss Life: Surviving My Own Small Business.”
If you have to put payroll on a credit card, it indicates you need to change your business plan, he says.
Plus, payroll is one of your biggest expenses. Putting that on a card means a lot of interest. “I just, in general, don’t like to owe credit card companies a lot of money,” says Downs.
If you need a less expensive way to finance payroll, look into a small-business line of credit through your bank or credit union, says Downs. The interest rates on small business lines of credit vary, but they often range from a few points over the prime rate and up. If you qualify, it can be a less expensive option for short-term loans than your credit cards.
But borrowing, in any form, is only for necessities (such as payroll) and only “if you are absolutely, positively sure that some cash is about to arrive,” says Downs. “If you are trying to bail out a sinking ship, there is no good reason to borrow.”
5. Legal settlements
Charging legal settlements signals to card issuers that your business is seriously stressed, and card issuers are going to wonder about your ability to repay them. Plus, if it’s more money than you can pay out of pocket, that means you’re going to be adding credit card interest to the tab.
6. Cryptocurrency and other high-risk investments
A number of card issuers have banned charges to buy cryptocurrency, yet a quick search online will give you more than a few results with options to put cryptocurrency on your credit card. But even if you can put cryptocurrency charges on your card, it doesn’t mean you should. You’re trying to grow your business capital, so don’t use a credit card as a source of cash.
“I see a business credit card as something that should be used with great caution,” says Downs. “It’s easy to get behind on payments.”
Keep your personal habits – especially the vices – off the company plastic.
Even if you think you have a good reason for the charge, just don’t. From future lenders to your accountant, you never know who’s going to be looking at your credit card charges at some future date. When you put items on your company card bill, he says, “You’re now making a permanent record and broadcasting it.”
8. Excessive client entertainment
Sometimes treating clients is a part of business but it can be a fine line. And some of it just comes down to common sense.
If you’re flying to a conference and putting the airfare and hotel on your business card, no problem. If you’re staying two more days after the conference and taking your spouse, pay for those extra days (and your spouse’s ticket) with your personal card.
9. Cash advances
“The fact that you need a cash advance means you don’t have enough working capital – which is a problem,” says Tuomi.
Depending on how often you do it, how much you take and how long you wait to repay it, that could scare prospective card issuers and lenders. And it could prompt your current card issuer to raise the interest rate, lower your credit line or close the account.
In addition, with a cash advance, there’s no grace period. That means you start paying interest the moment the money pops out of the ATM – which is, on average, 24.80%, a CreditCards.com cash advance survey found. And there’s also a fee, she says. Between fees and interest, that can make it one very pricey source of money.
Overall, business owners report they are managing and maintaining their current credit card lines fairly well. In one 2017 survey, 77% reported that card issuers hadn’t changed their credit lines within the year, while 18% received a credit line increase, according to the National Small Business Association. Only 5% had their credit lines cut.
“People should not be thinking of their credit cards as back-up working capital,” says Tuomi. “Instead, you should think of them for record-keeping. And it makes it convenient to pay for all those small purchases.”