two hands holding a business credit card
Jordan Schneir
By: jordan_shneir
Read in 10 minutes

Do’s and Don’ts When Using a Business Credit Card

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Using a business credit card can have tremendous benefits for small business owners—if you know how to use it wisely. Whether you’re thinking about opening your first card or you already have one, it’s important to understand the benefits and risks of financing your business through credit.

Benefits of a Business Credit Card

  • You can grow your business: As your business grows, you will take on more expenses. If you can’t quickly pay for those critical necessities, your business won’t be able to expand as rapidly as you would like. A business credit card gives you easy access to funds so you can pay for the essentials your business needs to operate at maximum capacity. You can learn more about this in the blog post Use a business credit card to capitalize your business. In this sense, a credit card can provide you with the capital you need just as a business loan would do. But which one is better for you? It depends on your circumstances, needs and goals. To learn more about the differences between these two sources of capital read Unsecured Business Loans vs. Credit Cards.
  • You can establish your business’ credit history: Just like people, business’ need a credit score. Without one, it will be difficult for you to receive a loan for your business. A business credit card provides a quick and easy way to start your business’ credit history. Learn here other ways to build your business credit quickly.

Risks of a Business Credit Card

  • Maintaining  high balances: This is the most important risk when using a business credit card. Many business owners think they’ll be able to pay down their credit card soon, unfortunately, but most of them keep high balances for over 60 days. Not only is this expensive, but it hurts the owner’s personal credit score.
  • You could overspend: Businesses need to spend money they don’t have on hand in order to grow. But having a new line of credit can sometimes lead businesses to spend too much too soon. If you can’t pay off your credit card bill on time, that can harm your business in the long run.
  • You could hurt your credit rating: Not only will you incur late fees and other charges by missing credit card payments, but you can also harm your business’ credit score. A poor credit history is a red flag for prospective money lenders. Even a one-time credit issue can have long-term consequences for your business.

Despite the risks of opening a business credit card, it’s important for business owners to separate their personal finances from their business finances, and a business credit card it’s an excellent tool for that purpose. Also, a card can help provide important clarity for tax and legal purposes, and it will help streamline all of your business expenses so you can get a better handle on your business’ spending.

To make sure you take advantage of the benefits of opening a business credit card and avoid the risks, here are five do’s and don’ts associated with this form of financing.

Do’s

# 1. Pay off credit card bills as soon as they come due
Make sure to always pay your credit card bills on time and avoid late payments at all costs. Not only will this ensure that you’re creating a credit history for your company, but it will also help you manage your expenses and maintain them at a reasonable level.

# 2. Use your credit card for emergency cash
Sometimes, your business will need to make some sudden, unexpected payments. Business credit cards are ideal for these scenarios. But note that this is only recommended if it’s a one-time event that is not expected to have a long-term impact on the business. if business owners constantly find themselves in difficult situations, it’s likely a business model issue and they should avoid taking on debt until they can earn more profit to pay down debt.

# 3. Choose the type of card that has the best benefits for your particular business
One of the greatest benefits of this type of credit cards is that they come with rewards for business owners.  Research thoroughly before choosing a business credit card to ensure the one you select has benefits that make sense for your business and the expenses you plan on using the credit card to pay for.

# 4. Research terms and fees
You don’t want to get caught unaware by a fee from your credit card. To grow your company, you can’t afford to incur any unnecessary expenses. By thoroughly understanding your credit card’s terms and fees, you can take the proactive measures necessary to avoid any of these expenses. And if you think some of the hidden fees would be unavoidable for your business, find a different card to use.

# 5. Monitor credit card usage to track business expenses
Tracking business expenses can be a difficult and painstaking process—but credit cards already organize all of that information for you. Getting a business credit card can pay tremendous dividends by helping you better manage and understand your expenses.

Don’ts

# 1. Let your business credit card bills exceed the amount you can afford to pay
The hazards of a poor credit rating for a small business are too great to risk. Make sure you’re not spending more than you’ll be able to pay when the bill comes due. Never let your balance exceed the 30% credit limit on your card. When your balance is more than 30% of your credit limit, it will affect your credit score.

# 2. Use your business credit card to pay for expensive assets
Because credit cards have high-interest rates, they make sense for smaller, more basic business essential purchases—but they don’t work well for capital assets. If you need to purchase items like expensive machinery, those purchases are best done through lower interest loans.

# 3. Use your business credit card for long-term investments

Business credit cards are meant for charges that can be paid down within 60 days. If the business owner doesn’t expect to get a payback in over 60 days and therefore doesn’t have the funds to pay down the credit card, then he shouldn’t consider this option and should apply for a long-term loan instead.

# 4. Make unnecessary purchases to get more rewards
The value of the credit card is in how it allows you to make purchases quickly and easily—any rewards or points you accrue for those expenses are added bonuses. But those bonuses should never be the primary goal of the purchases you make. If you buy things you don’t need with the credit card, you run the risk of spending more than you can pay off.

# 5.Use your card for personal expenses
It can be tempting to put personal expenses on the business credit card. But you should never mix personal with business finances. The purpose of the business credit card is to help you separate those two components. Mixing them undermines that important purpose and puts you in tax and legal risk as well.

 

To sum up

If you manage to avoid the risks, using a business credit card will help your business prosper. It’s a useful tool for separating your personal and business finances, and it streamlines many of your business expenses so you can keep track of them more effectively.

Even if a business credit card isn’t sufficient for purchasing everything your business needs, it can still help you get additional funds in a near future. The credit history you will establish by using a business credit card will inspire confidence in lenders who would consider giving you a loan. When you are ready, apply for a Camino Financial business loan to help pay for those more expensive items your business needs to grow.

 

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