Cashflow problems in the start-up phase are something many entrepreneurs have had to deal with. In fact, there are several financial options tailored specifically to small business owners in this situation. These include government grants, federal small business loans, and even microfinance packages from lenders like Vancity.
Despite all these choices, a worryingly large percentage of small business owners continue to use personal credit cards to fund business-related purchases. A recent study by the Canadian Federation of Independent Business puts the figure at around 30 per cent of entrepreneurs, and while it might be ok to turn to your personal credit in a pinch, it’s all too easy for it to become a regular occurrence.
Given the potential for damaging long-term effects, we’ve listed six reasons why you shouldn’t use your personal credit card for business expenses.
The debts you accrue on a personal credit card are your responsibility. Business transactions can involve thousands of dollars, pushing you toward maxing out your credit limit in short order. This will leave you zero headroom for normal day-to-day transactions. If you decide to take the recommended route of opening a business account with business credit card, you’ll likely have a higher limit and the liability will rest with the business and not on you. Your personal financial status will usually be protected, but this can vary depending on the nature of your business structure.
Every business transaction you carry out with your personal credit card can have a direct impact on your credit rating. If you were to find yourself maxed out, or defaulting on your minimum payment, it will negatively affect your personal credit rating, leaving you in a difficult position for future loans like mortgages.
It’s standard practice in many small businesses for the company credit card to be used by employees to make business-related purchases. You do not want a situation where employees are using your personal credit card on the business’ behalf. Adding employees to a company credit card is easily done, and easily tracked.
One of the best aspects of using a credit card is earning reward points. This doesn’t just apply to personal cards – Did you know company credit cards often have specialized rewards programs tailored toward business? These can take the form of discounted hotel rates, airline discounts, business services and access to exclusive airport lounges. Before you take the plunge, it’s recommended to use one of the online comparison sites to see which credit card offers business rewards that line up most accurately with your needs.
When tax season arrives, you’re going to want the process to be as painless as possible. Picking through your personal credit card statements to try and identify business expenses takes time, can lead to mistakes, and could even end in an audit. Save yourself the difficulty by keeping these expenses in one place – your business credit card.
Building Business Credit
While this may seem obvious, using your personal credit card will prevent you from building your business’ credit profile. Working on this is essential for any small business as it will enable you to tap into a larger selection of financial options down the line. Potential lenders will want to see your business’ track record of handling credit responsibly and appropriately.