We want to be transparent about how we are compensated. Some links in articles are from our sponsors. Learn more about how we make money.
As a small-business owner, you need a credit card. Whether it’s to pay for extra memory in that sleek new Galaxy S10 Plus phone, place orders on Amazon, or just so you don’t have to carry a lot of cash or an unwieldy checkbook to the store when you buy supplies. The question is, should you use a personal credit card, or get a business credit card?
Here are 5 things to remember about using a credit card for your business, to help you choose.
Separating business credit transactions doesn’t require a business credit card
Americans usually have more than one card. According to Credit Karma, the average number of cards carried by Americans is between 2 and 3. Credit Karma members have an average of nearly 5. This means you can take an existing card, pay off the balance on it, and start using it for business.
Using credit cards simplifies your tax reporting no matter the type of card
First, your card statements give you a record of transactions even if you lose receipts. Second, paying with a card reduces the number of Forms 1099 you need to send out at the end of the year. Say you paid more than $600 to the company that cleans your offices. If you charged it, the card issuer will send them a Form 1099 so you don’t need to.
Get rewards for business spending even if using a consumer credit card
Business expenses are a fact of life. You have to spend money to make money. However, if you use a credit card that offers say a 2% reward, and charge an average of $5000 a month, you’ll get an average of $100 a month back on those deductible expenses. Sweet! This is just as true using a consumer credit card with rewards as a business credit card.
Business credit cards are often linked to your personal credit and hold you personally liable
Setting up your business as an LLC or S-corp protects you from business creditors. This means that if you default on paying the minimum payments to your business card or loan, the creditor should be limited to going after your business assets. This is true, unless in the small print they got you to add yourself as personally liable for any balance owed. In that case, being late on payments will still ding your personal credit score.
The Credit CARD Act doesn’t protect your business credit card
The 2009 Credit Card Accountability Responsibility and Disclosure Act stopped some of the worst abuses heaped by credit card issuers on consumers. However, this doesn’t apply to business credit cards. The small print of such cards’ agreements often hide a bunch of traps for the unwary. Most business credit card contracts allow issuers to do things like:
- Change terms at any time, including raising rates on balances you already owe
- Apply penalty interest rates without notice for any violation
- Apply penalty fees that can be far in excess of the value of your violations
What You Should Do When Choosing a Credit Card for Your Business
In my opinion, if you’re like most small business owners, it’s best to dedicate a consumer credit card for use in your business. the Credit CARD Act protects such cards, so the small print likely hides far fewer “gotchas.”
Consider these three things if you have your eye on a business credit card that offers seemingly great perks and rewards.
- Are the requirements to cash in on those special offers ones you can easily meet (and are they worth it)?
- Are there annual fees, and if so, do the benefits of the specific card outweigh that cost?
- Does the small print hold you personally liable for charges on the card?
If you still decide to go this route, choose the best business credit card you can qualify for (NerdWallet offers a useful list), read the fine print carefully, and set up a system to pay off the card in full each month, even if you have to cover it from another source such as putting money into your business account from your personal checking.
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author:
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.