In the latest entry in our series on business finance, we’re discussing how easy it is to fall into the trap of using your personal credit card for business-related finance, and why it’s important to avoid doing this.
If, like plenty of other entrepreneurs, you’re feeling the cash flow pinch in the start-up phase, there’s a “eureka” moment where the idea pops into your head to put expenses on your personal credit card. It’s easily accessible, you don’t need to speak to anyone at a bank, and nobody will know about it except for you. Sounds like a foolproof plan, right? Unfortunately, it can prove the beginning of a slippery financial slope for a lot of new business owners.
The Canadian Federation of Independent Business believes around 30 per cent of entrepreneurs regularly use their personal credit card to fund business-related expenses. Sure, it’s fine to use this line of credit in a pinch, but there are plenty of reasons not to let it become a habit. Here are five reasons to avoid using your personal credit card for business expenses.
Every time you sign up for a phone contract, a personal loan or even a mortgage it’s likely a credit check will be performed on you. Every business transaction you carry out with your personal credit card can impact on this hard-earned rating. Imagine a scenario where you end up maxed out due to business expenses and default on the minimum payment. If this happens, you could be dealing with the credit rating hit for years to come.
On a similar note, all debts accrued on a personal credit card are your responsibility. Business transactions can involve sums in the thousands of dollars. This will leave you zero wriggle room for your day-to-day expenses. Take the recommended route of opening a business account with a business credit card. It will have a higher limit and the liability will be on your business and not you.
It’s time to imagine another scenario – when tax season comes around, imagine having to pore over your personal credit card statements to pick out business-related expenses you can deduct from your tax? It’s the very definition of a chore. If you go the sensible route, and keep these expenses to a business credit card, it allows you to view all these potential deductions in one easy place.
Build Business Credit
Like any individual a business can also build up a credit rating. The quickest way to do this is to build a history of making payments in full and on-time with a business credit card. Potential lenders will look favourably on future loan applications if they’re submitted alongside a healthy credit rating. For assistance with any aspect of the business bookkeeping world, we recommend speaking to our friends at Bench.
Now that the serious stuff is out of the way, let’s get on to the fun part – rewards programs. Business credit cards often will have specialized rewards programs with really cool perks. These can include discounted hotel rates, airline fares and even access to exclusive airport lounges.
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