The launch of a new business can be an exciting and worthwhile accomplishment. While there are many ways to effectively operate and grow a business, establishing a separate business credit account is an important step to its success. Not doing so may prove detrimental to both your business and personal finances.
While it can be tempting to use your personal credit to finance your business, this can prove to be a poor decision, especially around tax season. Personal and business expenses wrapped up on one credit account increases the likelihood of accounting errors. Imagine the tedious job of going through billing statements each month in order to try to determine which was a business or personal expense. Mixing the two up can even result in errors on your taxes, which can open you up to increased legal scrutiny.
As a business owner, you strive to protect your personal assets by keeping both entities separate and distinct. However, using a personal credit card for business expenses breaches this separation and may cause you to lose certain protections. For example, if a legal action is filed against the business, it becomes more difficult to account for the various expenses and assets if they were subsidized on a personal credit card.
The dangers of intermingling business expenses with personal credit become an even larger problem when applying for personal loans or home mortgages. Higher credit card bills due to the combination of personal and business expenses may be difficult to pay off month to month. This, in turn, will adversely affect your credit score that lenders use to determine loan approval.
So, what exactly differentiates a business credit card from a personal one? While both cards are similar in that they provide a revolving line of credit, business cards are specifically used to build credit just for the business itself. They also provide rewards and benefits that are catered to businesses, such as additional travel miles and discounts on business equipment. Additionally, business credit cards have higher credit limits to provide room for the purchase of business assets. Because cash flow can be sporadic at times, card issuers may offer different payment terms to allow owners the freedom to finance larger purchases over greater time periods.
As we’ve seen, using your personal credit card for business expenses can complicate record-keeping, reduce your personal asset protection, and even make it more difficult to be approved for loans. By using a separate business credit card, you can reduce your liabilities and eliminate these headaches. Contact us for any questions you may have regarding a business credit card.