One of the first pieces of advice you’ll receive as a small business owner is to keep your personal and business finances separate. Clearly defined finances help with declaring your business, bookkeeping, and tax preparation. One of the easiest ways to keep business expenses separate from personal expenses is by opening a corporate credit card. How does a corporate credit card work and how can it be a benefit, not a burden, for your business? Surprisingly, they aren’t much different from the personal credit cards you carry. Here are a few insights on how to use your business credit card wisely, what your personal responsibility is for a business card, and how to implement appropriate policies for employees that use them as well.
How to Use a Business Credit Card
A corporate credit card is a revolving line of credit that allows business owners to make purchases as necessary. When you compare using a business card to applying for a business loan or line of credit, credit cards are often easier to qualify for. Although, it is important to know that business card issuers will look at both personal and business credit history during the approval process.
Your business card carries a maximum credit limit and you can only spend up to that amount. While business cards typically carry a higher credit limit than personal credit cards, you will still need to repay the balance each billing cycle or interest charges will be applied.
When you find that account receivables are behind, sales are in the slow season, or your business is short on immediate cash, corporate credit allows you to make necessary purchases to keep your business running efficiently. It also makes it possible to conduct online transactions with vendors and suppliers.
Building a Business Credit History
Everyone has a personal credit history that is used to calculate a credit score, which is evaluated when they apply for a loan or insurance. It lets lenders know how credit-worthy they are. Your credit history is built upon your ability to carry and repay debt responsibly. Small businesses also have a business credit history which is used to measure their credit-worthiness.
How does a corporate credit card work toward building a business credit history? Responsible use of a business card is a smart tool for building your credit history. This means making a habit of staying below your credit spending limit, paying more than your minimum payment each month, and paying your bills on time. A positive credit history that spans several years makes it possible for your business to qualify for business loans and receive favorable interest rates and terms, in the future.
Personal Responsibility for a Corporate Credit Card
As we mentioned, credit card issuers review a business owner’s personal credit history during the application review. Additionally, several credit card companies will report business credit activity to consumer credit bureaus, which means it could show on your personal credit report. This means late payments or skipped payments on your business cards can reflect on your personal credit. “Basically, treat a corporate credit card as if it were your own personal credit card. Avoid carrying a balance and make sure to pay on time, and over time, you AND your business can benefit from less fees, better loan rates, and a favorable credit history,” added Phil Fry, Business Services Manager at Diamond Credit Union.
Finally, most business credit cards require the business owner to sign a personal guarantee as part of the application process. This guarantee makes you personally responsible for your business’s debt if credit card balances are not repaid.
Corporate Credit Card Policies for Employees
Just like with personal credit cards, it’s possible for business credit card spending to get out of hand. But when a company has a clearly-written credit card policy in place, that employees know they must follow, then expenses can be kept in check. Here are a few things you should ask yourself when putting together a company credit card policy.
Who gets a business card?
For very small companies, it’s easy to operate with just a single company credit card. As your business grows, however, you might consider giving other employees access to credit cards. Perhaps your business development team needs a card for pay for client entertaining. If you have team members who travel frequently, they may need a card to cover transportation, hotels, and meals. You’ll need to determine which employees will be issued a credit card.
Who pays the bill?
In some instances, corporate credit card statements are sent directly the company for payment. In other instances, the credit card statements are sent to the individual who holds the card. The cardholder pays the balance and then submits an expense report to the company for reimbursement. You’ll need assess which payment process is best for your company. Whichever method you choose, you should do a review of your employees’ charges (statements and receipts) to ensure they are using their card responsibly.
What are the spending limits?
Your policy can spell out the types of purchases that can be made on a business credit card, as well as put limits on the amounts spent. For example, you can put a cap on what can be spent for personal meals while traveling, limit air travel to economy or business class, or choose not to cover the cost of alcoholic drinks at meals.