Few experiences in business are universal, but here's one that is: Running a company isn't cheap. In fact, it requires a lot of capital—often, up front, even when you're not generating any revenue to speak of. Thankfully, business credit cards make it easy for owners and employees to make purchases without having to worry about their daily checking account balance getting out of whack. Charging purchases on a business credit card does more than just free up cash: it also allows you to take advantage of special perks, membership bonuses, and even low- or no-APR rates.
But for all of the perks of a small business credit card, there are also a number of pitfalls. Some come in the form of missed opportunities, such as picking a card that doesn’t offer you perks and points in categories that match your purchases. Other mistakes—such as paying for long-term investments with a credit card—can be much more costly. Here are a few of the biggest business credit card mistakes to avoid.
Carrying a High Monthly Balance
Credit cards are great for making purchases big and small. So long as you’re underneath your credit limit, you’re free to use your card to pay for what you’d like.
The trick is knowing that you can actually pay off your balance—either partially, or in full—every month. Whenever you carry a high monthly balance on your business credit card, you’re paying a steep interest rate which, in turn, can make your statements balloon over time. Unless you have a credit card with a promotional 0% APR and pay it off within the introductory time frame, you may end up paying more in interest for large purchases than you would if you sought alternative financing.
If you need to make a big purchase that you can’t pay off quickly, consider obtaining a line of credit instead. A line of credit provides your business a fixed amount of funds from which you can pull when you need to make purchases, handle cash flow gaps, or for any other situation in which you need access to a little extra money. A line of credit will have more generous repayment terms and interest rates than a credit card.
Using Your Card to Finance Long-Term Debt
The number of financing options available to small business owners—let alone all of the different terms and conditions that come with them—can be intimidating. No wonder it’s difficult for entrepreneurs to pick the wrong kind of financing for their major expenditures.
It’s tempting to put big purchases on a business credit card. After all, you can rack up points and perks depending on what kind of card you have. But here’s the rub: putting these kinds of large purchases only makes sense if you have the cash to pay off your credit card statement. Otherwise, you’re paying a much higher interest rate than you ought to be—making your points much more expensive than they ought to be.
These kinds of expenses rarely make sense as credit card purchases. Instead, you should consider equipment financing or working capital loans.
Equipment financing helps small business owners purchase the machinery, equipment, and tools they need in order to make their company function. These loans cover everything from tractors to laptops, don’t require borrowers to put up collateral (since the equipment itself fulfills that role), and usually come with an interest rate that can be cheaper than your credit card’s APR.
Working capital loans can come in handy for covering day-to-day expenses—the kinds of costs that come with keeping the lights on. For example, working capital loans can provide a way to pay your shop’s rent and might come with a lower interest rate than a credit card.
Choosing the Wrong Card for Your Business
Even if you’re using your small business credit card like a pro, keeping your balances low, and sourcing other kinds of loans to finance business purchases, you may not be making the most of your card. Not every small business credit card is created equal—nor is every card the right choice for every business.
Picking the right business credit card means knowing what you need the card for. Simply picking a card because it has no annual fees or a low APR doesn’t necessarily take every important consideration into account. You might be leaving money, points, and perks on the table if you don’t do your homework.
Say you need to finance a large purchase and pay it back over time. If you pick a card with a 0% introductory APR, and know you can pay off your balance by the time that the regular APR kicks in, you can basically avail yourself to an interest-free loan. Or, if you know you need to make frequent purchases from the same stores (or the same kinds of stores), you can pick a card that gives you bonus points for certain categories.
Before you pick your card, consider your spending habits, upcoming purchases, and your payment strategies. Don’t be afraid of credit cards with annual fees, either. Many of the most feature- and point-laden cards come with fees, but the perks you get in return are usually worth more in savings and discounts than the fees themselves.
Mixing Personal and Business Transactions
This is the most fundamental aspect of using your business credit card wisely. Business transactions and personal purchases must stay completely separate from one another, lest you incur the wrath of your accountant.
There’s a good reason for keeping personal and professional transactions separate, too. Doing so makes bookkeeping easier, lessens the chance of tax problems down the line, and can help you track the financial health of your company (and your personal life!) without having to detangle expenses line-by-line.
Another reason to keep personal and business transactions separate from your business credit card comes down to liability. The reason most entrepreneurs set up an LLC or corporation is to limit their personal liability in their business transactions. That’s only possible if you ensure that there’s a clear separation between your business and your personal finances.
There’s no reason not to open a business credit card since options abound for even those entrepreneurs who have poor personal credit. Your personal and business finances may alter the range of cards from which you can choose, but there are still plenty of cards out there that offer different perks, points, sign-up bonuses, and introductory interest rates that can suit your business needs. Just make sure to do your homework, understand your needs, and choose wisely!