By Dana Dratch | Published: March 30, 2018
As any smart entrepreneur knows, there are some things you don’t put on business plastic.
If you’re a small business owner, you probably live on your credit cards. Business credit cards offer rewards, lower average interest rates and perks designed to appeal to company owners and business travelers alike.
And in 2017, almost a third of small businesses – 31 percent – used credit cards to meet their capital needs at some point, too, according to a 2017 report by the National Small Business Association.
Business cards also operate under a different set of rules than personal credit cards, as the protections of the Credit CARD Act of 2009 don’t apply.
While some might include some personal-card protections, these are just a few reasons why business cards are different:
- Issuers can raise rates and lower credit lines at the first sign of financial stress.
- There isn’t a mandatory cap for late fees.
- Over-limit fees are allowed.
- If you pay late or default on a business card, it could end up on your personal credit history.
All of this means that smart business owners are very careful with business credit.
“You have to have a budget,” says Steve Strauss, author of “The Small Business Bible.” “And you have to make sure your expenses are within your budget.”
Whether you’re running a one-person shop or a burgeoning small company, here are eight expenses you don’t want to charge on your business credit card:
1. High-dollar items.
You need a high-ticket item for the business, and you have enough room on your business credit card. It can be tempting to whip out that plastic.
But credit cards aren’t always your least expensive loan. As of late March 2018, the average interest rate on a business card stands at 14.01 percent – lower than the national average credit card APR of 16.47 percent, but still potentially higher than a loan’s APR. APRs matter if you’re going to carry the balance for a couple of months.
“You might be paying a lot more interest” than necessary, says Strauss.
Shop your options before you buy. Can you get a small business or personal loan at a lower interest rate? Or can you open a business credit account with the vendor or put aside money until you can afford to charge the item and pay it off at the end of the month?
And, especially in the early years of your business, you may want to wait until you have the cash to cover the expense before you make that charge.
One of the common traits among budding business owners and entrepreneurs is over-optimism over how much they’ll make and the debt they’ll be able to shoulder, says Krista Tuomi, a professor at American University and expert on entrepreneurial finance.
Her advice: “Don’t put anything on the card you can’t pay off almost immediately.”
2. Business trip extras.
Just because you’re on a business trip doesn’t mean every expense belongs on your business credit card. Just use the same common sense you would at home, says Strauss.
Entertaining clients? Legit, within limits (more on that later). A mani-pedi at the hotel spa? Not.
New businesses often need business loans, and microlenders and peer-to-peer lenders are becoming more common, says Tuomi. “They are going to look at everything. And they’re not constrained at looking at just if you’ve paid on time.”
As a business owner, a couple of ill-advised charges “can come back and haunt you,” she says.
Is this a charge you would want to tell your mom or grandmother about? If not, either skip it or pull out the personal credit card.
There are a number of online apps and management tools that let you link a credit card instead of a bank account to pay employees. And while this might not be an option for already established businesses, entrepreneurs just launching their ventures might consider putting payroll on their cards when money’s tight.
But putting payroll on your card is not a move you want to make. “It’s a symptom of running out of money,” says Paul Downs, author of “Boss Life: Surviving My Own Small Business.”
If you have to put payroll on a credit card, it indicates you need to change your business plan, he says.
Plus, payroll is one of your biggest expenses. Putting that on a card means a lot of interest. “I just, in general, don’t like to owe credit card companies a lot of money,” says Downs.
A less-expensive option: A small-business line of credit through your bank or credit union, he says.
The interest rates on small business lines of credit vary, but they often range from a few points over the prime rate and up. If you qualify, it can be a less expensive option for short-term loans than your credit cards.
But borrowing, in any form, is only for necessities (such as payroll) and only “if you are absolutely, positively sure that some cash is about to arrive,” says Downs. “If you are trying to bail out a sinking ship, there is no good reason to borrow.”
4. Legal settlements.
This one is a double-whammy. First, it signals to card issuers that your business is seriously stressed. Which means card issuers are going to wonder about your ability to repay them. Plus, if it’s more money than you can pay out of pocket, that means you’re going to be adding credit card interest to the tab.
Pro tip: Some collectors or creditors will encourage you to look at credit card credit lines as an asset. They’re not. Cards are simply a payment device. Negotiate based on the actual cash your business has available.
5. Bitcoin and other high-risk investments.
Investing in your business is one thing. Using your business cards to make investments such as bitcoin? Not smart. And while a number of card issuers have banned charges to buy cryptocurrency, a quick search online will produce more than a few results with options to put bitcoin on your credit card.
But even if you’re trying to grow your business capital, you don’t use a credit card as a source of cash. “I see a business credit card as something that should be used with great caution,” says Downs. “It’s easy to get behind on payments.”
Remember that investment that can go down as well as up, plus you will owe transaction fees. That is a recipe for a pile of high-interest debt.
From porn to cigarettes, keep your personal habits, especially the bad ones, off the company plastic.
Further, from future lenders to your accountant, you never know who’s going to be looking at your credit card charges at some future date. When you put items on your company card bill, he says, “You’re now making a permanent record and broadcasting it.”
7. Excessive client entertainment.
Sometimes treating clients is a part of business. But it can be a fine line. And some of it just comes down to common sense.
If you’re flying to a conference and putting the airfare and hotel on your business card, no problem.
If you’re staying two more days after the conference and taking your spouse, pay for those extra days (and your spouse’s ticket) with your personal card.
8. Cash advances.
“The fact that you need a cash advance means you don’t have enough working capital – which is a problem,” says Tuomi.
Depending on how often you do it, how much you take and how long you wait to repay it, that could scare prospective card issuers and lenders. And it could prompt your current card issuer to raise the interest rate, lower your credit line or close the account.
In addition, with a cash advance, there’s no grace period. That means you start paying interest the moment the money pops out of the ATM – which is, on average, 23.68 percent, a 2017 CreditCards.com cash advance survey found. And there’s also a fee, she says. Between fees and interest, that can make it one very pricey source of money.
But on the whole, business owners seem to be managing and maintaining their current credit card lines fairly well. Seventy-seven percent report that card issuers haven’t changed their credit lines in the last year, while 18 percent received a credit line increase, according to the National Small Business Association survey. Only 5 percent had their credit lines cut.
“People should not be thinking of their credit cards as back-up working capital,” says Tuomi. “Instead, you should think of them for record-keeping. And it makes it convenient to pay for all those small purchases.”
See related: 6 questions to ask about your company credit card, 6 reasons entrepreneurs should get a business card
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