Paying for business expenses with a personal credit card is common practice for small business owners. It's not only convenient but also allows you to take advantage of the incentive programs of personal card issuers. The temptation to do so is understandable. Although it's legal to use a personal credit card for business expenses, there are some drawbacks of which you should be aware.
TL;DR (Too Long; Didn't Read)
Generally, it is not recommended to use a personal credit card for business expenses since it may lead to inaccurate financial reporting, mixed tax deductions and hefty fines. Doing so may also affect your ability to build business credit, qualify for small business loans and receive credit card payments from customers.
Research Your Financing Options
Raising startup capital is one of the biggest challenges of founding a new business. In fact, nearly 30% of startups are forced to close their doors because they run out of money. Most lenders do not feel comfortable working with startups and will most likely decline their loan applications.
One option is to reach out to investors and venture capital firms, but you risk losing control of your small business. You may ask your family and friends for help. However, if your business fails for some reason, your personal relationships may suffer.
If you have a solid business plan, you may apply for a loan through the Small Business Administration. Lender Match, its funding program, connects entrepreneurs with lending institutions and community development agencies, facilitating access to capital for startups and small businesses. Compared to traditional bank loans, SBA-guaranteed loans have lower rates and flexible overhead payments. Entrepreneurs can borrow anywhere between $500 and $5.5 million depending on their credit strength, industry, business plans and other factors.
These funds are difficult to access, though. Be prepared to deal with piles of documents and work on establishing or improving your business credit. Additionally, SBA-guaranteed loans are only available to entrepreneurs who have invested time and money into the business and cannot get funds from other sources. Considering these aspects, paying for business expenses with a personal credit card might be your only option.
When to Use Personal Funds
A 2018 Federal Reserve survey has revealed that 69% of business owners used the company's earnings as a primary funding source. Another 18% used their personal funds, and only 13% relied on external financing. More than half of respondents used business credit cards on a regular basis. However, 71% of those struggling with financial challenges paid business expenses from personal funds.
Whether you're starting a new venture or dealing with financial emergencies, you may use personal cards for business expenses. The same goes for those trying to build credit or earn cash-back rewards. Furthermore, personal credit cards are regulated by the 2009 CARD Act, which protects consumers against interest-rate hikes, deceptive practices and undisclosed fees.
This should be your last resort, though. By mixing your business and personal funds, you pierce the corporate veil and may lose your limited liability protection. Bookkeeping and accounting can become more challenging too.
Before using your personal funds to finance your business, try to figure out what other options are available. Research the different types of business credit cards and lines of credit, small business loans, crowdfunding opportunities, credit unions and so on.
Personal vs. Business Credit Cards
Blurring the line between leisure and business is rarely a good idea. Generally, it's wise to keep your personal and business finances separate. However, there are circumstances when you may need to use your personal credit cards for business expenses. What's the difference between personal and business credit cards in the first place?
While it's true that paying for business expenses with a personal credit card is more convenient, business credit cards could have special perks that you're missing. First of all, these financial tools can help you build business credit and can even improve your credit score when used responsibly. Most lenders will check both your personal and business credit history when you apply for a loan, but using personal credit cards has no effect on business credit strength.
A strong business credit score can increase your odds of qualifying for loans, credit lines and equipment leases. It may even help you get lower business-insurance rates. The first step is to open a business bank account and pay your bills on time using business credit cards. Although you may pay higher interest rates, the advantages often outweigh any potential drawbacks.
Why Use Business Credit Cards?
From higher spending limits to easier bookkeeping, there are plenty of reasons to use a business credit card. While it's true that personal credit cards are regulated by the Credit CARD Act of 2009, most lenders extend this protection to small businesses. This isn't always the case, though, so make sure you ask about it.
Additionally, credit card issuers often offer business-specific benefits to their customers, such as free access to VIP airport lounges, bonus points, higher-limit purchase protection or cash back on advertising and shipping. Some even provide free employee cards. As you would expect, these rewards are geared toward businesses and may help reduce your expenses.
For example, the Business Gold Card from American Express comes with membership rewards and has no preset spending limit. Customers also have access to expense-management tools, hotel credit, baggage insurance plans, travel discounts and 24/7 access to medical, financial or legal emergency assistance when traveling more than 100 miles from home.
Similarly, Chase Ink Unlimited cardholders receive bonus points that can be redeemed for cash back and rewards. They also get free employee cards, purchase protection, fraud protection, extended-warranty protection, travel and emergency assistance and other perks.
Paying for Business Expenses With a Personal Credit Card
Using your personal card for business has advantages and drawbacks. If you choose to do so, you may find it difficult to track your business expenses. Having to sort hundreds of receipts isn't just time consuming but risky too. You may end up overreporting or underreporting your tax burden, missing out on deductions and paying hefty fines.
Another disadvantage is that you cannot track employee spending when using a personal credit card. Some credit card companies allow customers to set up business accounts and issue to their partners or employees individual cards tied to those accounts. This makes it easier to track corporate spending by your staff.
Generally, paying for business expenses with a personal credit card makes sense if you're self-employed and have low overhead costs. It's also a viable option for those who are not interested in building business credit to apply for a loan anytime soon.
For example, if you're more interested in buying a house rather than upgrading to a bigger office, then you may want to get a mortgage. In this case, using your personal credit card to pay for business expenses may help improve your personal credit score and make it easier to qualify for a mortgage loan. Someone who is planning to hire more people or buy equipment will benefit more from using a business card. This will help you establish business credit and increase your chances of getting a small-business loan.
Separate Business and Personal Finances
The SBA recommends keeping your business and personal finances separate for more efficient money management. This way, you'll find it easier to handle a potential tax audit, do your accounting and file taxes. Furthermore, you will avoid personal liability and streamline record-keeping processes. Other advantages include:
- Track your business income and expenses more easily
- Make more accurate financial forecasts
- Budget your expenses more effectively
- Identify small-business tax deductions with ease
- Have a clear picture of your company's profitability and performance
- Start over more easily if your business fails
- Avoid tax-reporting issues and IRS penalties
- Increase your chances of qualifying for small-business loans
- Authorize employees to handle transactions on behalf of your business
- Allow your customers to make check and credit card payments
- Opt for lines of credit when you need capital
- Make larger business purchases
- Display a professional image
Separating your personal and business bank accounts will help you save time. Why spend hours trying to figure out which expenses are business related when you can have this information at your fingertips?
When you have a business account, record keeping becomes easier and more accurate. Plus, you will be able to document each transaction in detail and avoid unnecessary stress when tax time rolls around.
If you register your business as a partnership or a corporation, it's legally required to keep a separate bank account. Failure to do so may result in fines and penalties. A corporation is a legal entity on its own, so it needs to have separate bank accounts and credit cards. On top of that, a business account helps establish a professional image with your customers, suppliers and investors, which may favorably impact your relationship with them.
Get a Business Credit Card
Applying for a business credit card isn't too different than getting a personal card. Most business entities, including sole proprietorships, are eligible for this service. Sole proprietors, for example, may apply for a business card with their Social Security number instead of an employer identification number.
The first step is to open a business bank account. Next, check your business credit score to determine the cards for which you are eligible. If you have no credit history, lenders will check your personal credit score. Have the following information at hand before you apply for a business card:
- Your company's legal name and contact details
- Legal structure (limited liability company, sole proprietorship, corporation, etc.)
- Number of employees
- Years in business
- Employer identification number or SSN (for sole proprietorships without an EIN)
- Total annual income (including any income you may have from your job or side hustles)
- Annual business revenue
- Average monthly business expenses (estimated)
- Your legal name, SSN and contact information
- Personal credit history
- Some sort of personal guarantee (which may be waived if you already have a positive relationship with the bank)
Once your application is submitted, the card issuer will review it and reach out to you by phone or email within a few days. In the meantime, your personal credit score may slightly drop because the inquiry will appear on your credit report. However, if your application is approved and you use the credit card responsibly, your credit score will bounce back.
Use Your Personal Card Wisely
Entrepreneurs with bad credit or no credit history at all may not qualify for business credit cards. If that's your case, then you may use your personal card for business purchases. The key is to build healthy credit habits, such as paying your debts and bills before the due date or sooner. This will help improve your personal credit score and keep it in good standing.
However, consider opening a business bank account at the very least. If you use personal funds to grow your business, record it as a loan or equity. Create a journal entry in your books to clearly show the amount of money transferred to your business bank account. Ideally, reach out to an accountant for assistance.
If you do qualify for a business credit card, research your options thoroughly before making a choice. Look for business cards that charge no interest rates in the first nine or 12 months and check the annual fees, which tend to be higher for cards with more rewards. If you work with international clients, choose a business card that doesn't have foreign transaction fees. Travel business credit cards usually fall into this category.
- CBInsights: The Top 20 Reasons Startups Fail
- U.S. Small Business Administration: Loans
- Federal Reserve: Small Business Credit Survey
- Investopedia: Credit Card Accountability, Responsibility and Disclosure Act of 2009
- American Express: American Express® Business Gold Card
- Chase: Ink Business Unlimited Credit Card
- U.S. Small Business Administration: 5 Ways to Separate Your Personal and Business Finances
- U.S. Small Business Administration: Open a Business Bank Account