From excessive client entertainment to payroll, there are some expenses you should not charge on your business credit card.
Business credit cards can make running a company considerably easier, and that’s true for business owners with employees as well as entrepreneurs who work alone. After all, business credit cards help you keep business and personal expenses separate for accounting purposes, and they can help you stay organized when it’s time to file your taxes, too. Even better, the top business credit cards offer rewards and perks that can easily be worth thousands of dollars per year.
That said, there are some things you should never charge to business credit cards in any scenario. There are several reasons this is the case, including the fact that business cards operate under a different set of rules than the personal cards. For business plastic, the protections of the Credit CARD Act of 2009 don’t automatically apply.
With this in mind, you need to know what you should and shouldn’t charge on a business card before you run into problems. This guide explains the main expenses you should keep off your business card, as well as the consequences you can face if you don’t.
1. Personal spending
It is not illegal to put personal expenses on a business credit card, but that doesn’t mean you should. After all, consumer credit cards come with protections afforded by the CARD Act that you don’t get with business credit cards. So, using a business card for personal spending means losing out on those protections altogether.
Not only that, but using a business card for personal expenses can make accounting and tax time much more complicated. Plus, there are plenty of credit cards for consumers to choose from, so there’s no reason to mix personal and business spending on the same card.
What happens if you use a business credit card for personal spending? You may make your finances unnecessarily complicated, and you’ll lose out on important consumer protections.
2. Pricey items or expenses you’ll need months (or years) to pay off
You need a high-ticket item for your business and you have enough credit on your business credit card. All things considered, 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 16.07 percent, lower than the national average credit card APR of 18.16 percent but still potentially higher than a loan’s APR. APRs matter, whether you’re going to carry the balance for a couple of months or a couple of years.
With that in mind, you’ll want to shop around 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?
What happens if you carry a balance on a business credit card for the long haul? You’ll pay a lot more interest than you should, and your expenses will cost a lot more than they did to start with.
3. Business trip extras
Just because you’re on a business trip doesn’t mean every expense belongs on your business credit card. For example, entertaining clients is a legitimate expense within the limits, yet getting a new tattoo during business travel is definitely not.
If you’re confused about what is and isn’t a business expense, you should speak with your accountant before you start making questionable charges. The Internal Revenue Service (IRS) also offers several online resources to help you weed out real business expenses from items you cannot deduct on your business tax return.
What happens if you charge business trip splurges to a business card? You can cause problems for your business with the IRS, and nobody wants that.
Putting payroll on your card is not a move you want to make, mostly because the interest charges will make paying your employees cost significantly more. And if you’re forced to charge payroll to a credit card due to cash flow issues, that’s a sign that it’s time to reevaluate your business plan.
If you need a less expensive way to finance payroll, you can also look into a small-business line of credit through your bank or credit union. 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, a short-term loan can be a less expensive option than your credit cards.
What happens if you charge payroll to your business credit card? If you don’t pay off the balance right away, you’ll likely pay sky-high interest rates until you can.
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.
If you owe a legal settlement that you can’t afford to pay, it makes sense to look into other small business financing options that can be less costly over the long run. Examples include small business loans and small business lines of credit, both of which can come with lower rates than most business cards offer.
What happens if you charge a legal settlement to your business credit card? You could spend far too long paying it off, and at rates that are higher than you might pay elsewhere.
6. Cryptocurrency and other high-risk investments
A number of card issuers have banned charges for buying 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.
Remember that the investment can go down as well as up, and you will owe transaction fees. And that’s a recipe for a pile of high-interest debt.
What happens if you charge crypto or other investments to a business card? You could wind up paying transaction fees and sky-high interest only for your investment to lose money in the end.
7. Cash advances
Our advice on cash advances from business cards is the same as for personal cards. You should never use a credit card for a cash advance unless you have no other choice, and you should question it even then.
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, taking out a cash advance means you won’t have a grace period. That means you start paying interest the moment the money pops out of the ATM.
What happens if you use a business credit card for a cash advance? You’ll pay cash advance fees and a higher APR on the cash advance amount. You won’t get a grace period either, so interest will begin accruing that day.
Business credit cards can make paying for business expenses a lot more convenient, and the best ones offer valuable rewards and perks that are well worth the cost of admission. That said, you should use business cards only for legitimate business purchases and only when you have a plan to pay the balance off.