For small-business owners just starting out, you may think that putting some of your startup costs on your personal credit card is the quickest way to get up and running. However, there are several considerations that should be weighed before you do that.
Why is it best to have a dedicated card for a business?
Personal and business cards can both give you access to lines of credit, but the two are different in how they operate. Personal credit cards are meant for individuals and their everyday personal needs, like household items and groceries. Business credit cards are meant to be used by companies for business expenses, and should be kept separate.
Here are a few reasons why it's a good idea to use a dedicated credit card for your business.
Business credit cards can reduce risks
When you keep your business purchases separate from your personal ones, it may reduce the risks that can come with owning a business.
- Reduces risk to your personal assets. Depending on the way your business is structured, there may be protections that can help safeguard your personal assets in the event that your business is sued. If you mix your business and personal finances, this may water down those protections, making it difficult to untangle what is part of the company and what is personal. Keeping everything separate helps reduce the risk to your personal assets posed by any business-related legal judgement.
- Reduces risk to your personal credit score. You don't want to risk maxing out or defaulting on your personal credit card in order to finance your business. This could negatively affect your personal credit score. If you keep your business expenses on a separate business credit card, you'll want to understand the reporting policies of the card issuer before you apply for any business credit card.
- Reduces risk of misidentifying an expense. You can reduce the risk of misidentifying a personal or business expense when your finances are completely separate. This is especially true when it comes to accounting and taxes. In the event of a tax audit, you won't want any blurred lines or miscalculations when it comes to what should have been accounted for as a business expense or vice versa.
- Reduces risk to cash flow mistakes. Understanding your company's cash flow is important to it's overall financial health. If you're using a credit card to manage your cash flow but it's being used for both personal and business expenses, you won't have a true picture of your available cash and risk making mistakes.
It's easier to track business expenses
Putting all your business expenses on a business credit card could make things easier during tax season and for general record-keeping. Depending on the card, you may also be able to link your quarterly expense reports to certain accounting software so you can track your spending and be prepared for tax season. This feature may not be available on personal credit cards.
In addition, when your business expenses are being thoughtfully tracked and itemized, you'll likely be able to identify any valuable tax deductions or unpaid invoices that need to be taken care of.
Business credit cards come with benefits
Some business credit cards come with perks such as custom expense reports, purchase protections, extended warranties, travel emergency assistance and more. In addition, some may offer the ability to accelerate your reward earnings on common business categories of spend.
Business credit cards build business credit
At some point, you may consider financing the growth of your business through a business loan or a business line of credit. When you responsibly use a business credit card by paying at least your minimum payment each billing cycle, you start to build a business credit score. This business credit score, similar to your personal credit score, is a way for lenders to evaluate your creditworthiness.
A high credit score, along with other factors, may mean you're considered for better terms and interest rates if you ever apply for other kinds of financing in the future.
Before mixing personal and business transactions on the same credit card, there are several things to consider. This could include accounting and tax-related risks, as well as the potential to negatively affect your personal credit score.
Having a separate credit card for your business makes it easier to track business expenses and stay organized for tax time. In addition, many business credit cards offer valuable rewards and benefits geared specifically to businesses.
If you're considering a business credit card, Chase offers several, which you can compare here.