Why is it a bad idea to use a personal credit card for business expenses?
For a company of any size, using personal cards for business expenses is never ideal. While it may seem convenient especially when you’re starting out, it can become quite chaotic when it is time to do the books at the end of the financial year.
Are you still using your personal credit card for business expenses? In the long run, that’s definitely not a good idea. Here’s why.
Depending on the governance and policies of your business, there may be a number of reasons why you shouldn’t use your personal card. More importantly, it’s an inefficient business accounting practice to run your expenses through a personal card, making it harder to track business expenses at the end of the quarter or the financial year.
“But we’re a small company. Isn’t it just easier to use our personal credit cards?”
For the business you own or which you are a founder, it may seem convenient to use your personal card, especially when you are starting out. However, filing small business taxes can be a nightmare if you have to manually track your business versus personal expenses. Unless there is a way to differentiate both spends, your personal finances may also end up taking a hit when your business does.
When it comes to employees, in many small and mid-sized companies, employees are able to use their personal cards for business expenses, and then file for reimbursements afterwards. Theoretically, as long as the employee is authorized and there’s a simple expense reimbursement process established, this shouldn’t be a problem.
However, in practise, this can get complicated, and when it does, it’s chaos for all parties involved. Having to separate corporate expenses from personal finances, and then file expense report paperwork (a.k.a. a lot of receipts, bills, and invoices) can cause a lot of frustration for your employees. You will also be wasting a lot of your accounting team’s valuable time and resources. Simply put, relying on your employees to use their personal cards for business expenses isn’t fair to your employees. It’s a tedious and suboptimal way to handle a straightforward process. It’s much better to empower employees by issuing them a company credit card that comes with built-in spend limits and automatic receipt matching.
“So what are the pros and cons of using personal cards?”
Using a personal card for business expenses can create serious problems for both the business and the owner of the personal credit card. Despite the fact that you shouldn’t use a personal credit card for business expenses, there are still plenty of people who do. According to one study, over 40% of all small business owners regularly use one or more personal lines of credit for business expenses.
There are plenty of benefits to using a personal credit card for business expenses, the most obvious being the convenience factor. Then there are the rewards you get from your personal card as well, like cashback points that can be redeemed for free flights or hotel stays.
- You can easily overspend. When you're on your own, it's easy to lose track of how much money you have left to spend on business expenses. In most cases, you will end up blowing through your budget.
- You can get into debt. This is especially true if you don't pay off the full balance each month, which means more interest payments that could've been avoided with a separate business card.
- It's hard to keep track of what you've spent and where—and that makes it harder to do tax time!
“So you’re saying keeping my personal and business finances separate is better, both personally and professionally?”
Making sure that your personal credit card is used only for personal expenses will help keep everything organized and easy-to-follow. It'll also help keep things fair when it comes time to pay back debts or loans; if there aren't any blurred lines between where one thing ends and another begins, then there's no confusion over what should be paid back first (or last).
If you're trying to run a successful business, it's important that you understand how each side of the budget works. You'll want to know what's happening with your earnings and expenses at all times, so that you can make smart decisions about spending—both for your business and for yourself. Transparency in your earnings and your spends is key!
When it comes to spending money, transparency is key.
Yes, we are repeating ourselves here. The fact that you're reading this article probably means that you want to make sure you're on the right track with your money. That’s why we wanted to emphasize again how important transparency is when it comes to spending. Transparent spending not only means keeping track of everything that goes through your business credit card and making sure it's all accounted for at tax time, but it also means being careful about what kinds of expenses are allowed on the card in the first place.
If transparency is something you value in your relationships (and why wouldn't it be?), then there's no reason why you shouldn't apply those same principles when it comes to managing your company's finances as well. The less secretive and more open-booked your accounting policies are, the less likely your employees are to take advantage of their position within the company. They could beputting themselves in legal trouble by doing things like padding their own pockets… or worse!
Advantages of using a business card
Businesses of all sizes require different types of credit cards to meet their needs, and it’s important that company owners understand the distinctions between them.
These days, there are better, more founder-friendly small business credit cards and corporate cards on the market.
There are various types of business cards to choose from, and each has its own pros and cons. However, all share a handful of advantages that make them a better alternative to using personal credit cards:
Build business credit
Establishing and managing business credit can help your small business secure financing when you need it, and with better terms at that. From small daily purchases to large-scale loans, your business needs credit to function. A business credit card can be one of the best tools for building business credit, provided you pay it off in full each month, or keep the balance low and make regular, on-time payments.
Many business credit card companies have fees associated with registration and yearly renewal. But some charge cards have no annual fees and operate at low or no cost to you.
Some corporate cards help you find value by incentivizing business spending with cashback rewards programs up to a certain limit. These programs allow you to redeem and earn frequent flyer miles, cash rewards, and exclusive discounts.
Financial institutions typically partner with a number of goods and services retailers, offering special rates, and other perks to cardholders.
Spend management platform
Finally, the best of the best corporate card companies offer additional ways to help you save, without incentivizing spending. This could be through an expense management platform and suites of products that give finance teams greater control and real-time visibility over company budgets, employee spending, and invoicing within a centralized platform.
At Alaan, our benefit for business owners and finance teams is our smart corporate cards that let’s you spend in the currency of your choice, receive up to 2% cashback on eligible card spend and more.
Get started with Alaan today which lets you automate expense management and track company spending in real-time. Sign up now. It’s free!