1. Personal spending
Business credit cards provide great perks and rewards which makes it tempting to swipe your personal expenses on them. No one is stopping you from swiping for personal use, at least legally. Well, your accountant will not be very happy when doing taxes because this creates extra hassle. This is just the tip of the iceberg.
Personal spending puts you and your business at risk. From harming your credit score to violating your company’s spending policies or voiding the card issuer agreement. After all, keep in mind that most likely you are working for a limited company. It’s always a good practice to have a detailed list of what qualifies as a business expense followed by a transparent way to track your budget.
2. Business travel turning personal
When you are at the office, there is a fine line between personal and business spending. Once, you go on a business trip, there seems to be this perceived freedom of spending. Do you really need a fancy hotel? Overstaying two days in an attractive destination? Why not get an extra ticket for your spouse to Paris for a weekend getaway? Obviously, putting these on a business credit card will get you better rewards and discounts, however, there is one big setback. All these transactions will appear in your company’s history. There is not a law prohibiting you from doing them and it is entirely up to your moral compass. A good idea is to try and think as if your manager is on a trip with you. Do you think this expense would fit your company’s culture? Would your manager do it?
3. Client entertainment
Often, in business, some clients need an extra push. While in many cases attentiveness and extra care do the trick, some clients are not impressed. Going above and beyond to impress a customer has its limits. Luxurious gifts, meetings at exotic destinations or even renting sports cars. All these activities are on the edge of doing business and bribing. If these expenses are in line with your company’s spending policy and you have a green light from management, the only relevant question is whether a business credit card is the best way to finance them.
4. Cryptocurrency, gambling and risky investments
An increasing amount of business cards are used for purchasing cryptocurrencies and gambling. Banks are tasked with the burdensome mission to cryptocurrency exchanges and suspicious platforms. Yet, there are plenty of places out there offering to accept your money and provide you with high returns. It may be tempting to use your business credit card for a quick way to invest, however, investments do not always go up. What’s more, when you factor in the interest rate and transaction fees, it is just not worth it.
5. High-cost purchases
Expensive purchases and credit cards are exactly where banks want you to be. Usually, business credit cards have high limits and tempting rewards. This obviously makes them attractive but if you are a small business looking for funding, wiping out your business credit limit in one go is something that impacts your credit score. Having a high utilization ratio coupled with ridiculously high representative APR, and carrying a balance is a recipe for getting in debt.
6. Cash advances
There may come a time when you are desperately looking for more capital. You might even consider cash advance as an option. However, simply because it exists, doesn’t mean that you should charge it on your business credit card. For starters, your cash advance APR will most definitely be higher than your purchase APR.
Another hidden truth is that cash advances come with a hefty fee and do not have a grace period. In other words, there is no interest-free period. The moment the cash leaves the ATM, you already owe more than you took. In this sense, yes cash advances are an option, but the extra convenience doesn’t come cheap.
7. Legal disputes
It is completely normal to have a legal consultant that keeps your business out of trouble. Charging it on your business credit card for convenience every now and then is perfectly fine. The issue arises when you start paying your litigation expenses. Would you invest in a company that is sued and covers all its legal expenses with their credit card? Exactly, it raises a red flag and makes you think that the company is in a state of distress. Whenever possible, try negotiating alternative payment plans that do not send a negative message to your stakeholders.
When you are growing your business, payroll is your largest expense. We discussed why high-cost expenses should be avoided. Payroll is a recurring high-volume expense. Putting it on your credit card clearly means interest rate risk and debt. Paying your customers out of your credit card sends a strong message that something is wrong.
If you have no other options, make sure you at least have a balance transfer credit card that buys you some more time to pay off the interest rate. Otherwise, resorting to your business credit card to cover payroll is simply rolling the dice and hoping for the best.
What are the takeaways?
Business credit cards provide great perks and bonuses, yet they are not a silver bullet. Yes, sometimes you may need some extra cash right away, but before you reach for your business credit card, you should know all the options. If you want to stay away from trouble, you should have an easy and transparent way to spend and monitor your budget.