Starting a small business always sounds easy in theory. Then reality comes crashing down. There are just so many subtleties that can make or break a business, and it gets a little difficult to keep track of them all. Some obstacles are inevitable, but others can be easily avoided with a little foresight. One of the biggest mistakes in the early stages of a small business is when a proprietor uses his or her personal credit cards for business expenses.
Some blend their expenses together because they think it’s easier to track; some are waiting for the CARD Act to include business cards in its set of regulations. In the long run, mixing your personal and business expenses will be more of a problem than a convenience, so it’s not worth playing the waiting game.
Keep it simple, keep it separate
If you’re considering or already in the process of starting your own business, here are a few reasons why you should consider a business credit card.
Build your business’s credit: At first, your small business card will probably be obtained using your personal credit score, but over time, an excellent payment history and a good relationship with your financial institution could build your business’s own credit line. Eventually, your business will be able to open new lines of credit without having to rely on yours.
Avoid confusion: Mixing your expenses can create unnecessary problems and confusion in the future. By having separate accounts, you can draw a distinct line between personal and business expenses, making it clear which transactions can be deducted. This will come in handy during tax time, and if you show your expenses to anyone else. You’ll need to keep on top of your business’ finances if you’re going to stay afloat.
Get organised: Many card issuers offer year-end statements with all of your transactions itemized and categorized. Having a separate business credit card will help you avoid sorting through a shoebox of receipts at the end of the year. It’ll endear you to your tax guy as well.
Keep an eye on employee spending: You can keep your employees’ spending in check by monitoring their statements and even placing a credit limit on their cards. You can make sure your money is going to the right place. Plus, you can earn rewards on your employees’ cards, and put that money back into the business.
Great business benefits and rewards: Using a separate business credit card could help you save money and earn some great rewards in the process. With a business card, you can earn discounts on some of the essentials, such as office supplies or travel. Plus, business credit cards usually have lower APRs than most personal credit cards and come with a reduced or no annual fee, giving you one less expense to worry about.
Drawing the line
Some expenses blur the line between business and personal. When in doubt, use your business card so you can take advantage of the low APR. It’s never good to carry a balance on your card, but credit card companies know that many businesses will use their cards for capital. Just treat your business card with the same responsibility you would a personal card, and your business will be off the ground in no time.
Choosing a business credit card
Business cards come in two varieties, just like personal cards: low APR cards, for those who carry a balance, and rewards cards, for those who don’t. In general, business credit cards have lower interest rates than personal ones. Some even cut you slack on paying off your balance. The American Express Plum Card is among the most flexible. You get up to 2 months revolver with no interest. In a pinch, if you pay 10% of the balance of all new activity plus all of the previously deferred amounts, you have until the next billing cycle to pay the remaining amount with no interest. Alternatively, you get 1.5% off your balance if you pay within 10 days. However, if you need more capital than a credit card can supply, you should consider a loan from a bank rather than using a credit card.
The rewards cards are skewed towards business expenses and travel, and many give you extra bonuses for hotel stays. The Chase Ink gives 5% back on office supplies, cable and telecom services, up to $25k in purchases a year, and 2% on travel and dining, up to $15k a year. Now that credit card companies are after potential rewards credit cardholders like a financial industry edition of The Bachelorette, signup bonuses are coming thick and fast. The Ink is now offering $250 cash back on signing, for example, while the Capital One Venture for Business whipped out a 10,000-mile promo a while back. Should you find yourself in a position to get a rewards credit card, hold out for a good signup bonus.
Tim Chen is the CEO of NerdWallet, a credit card website designed to help entrepreneurs find the best business credit cards.