As a small business, it’s relatively easy to get a credit card. In fact, according to CreditCards.com, 80% of businesses that apply for a business credit card are approved and the majority of businesses use their credit cards for the sake of convenience. Convenience really is the name of the game when it comes to using a credit card—but what exactly should that card be used for? Should a company use a credit card to pay business bills? To answer that question, we need to take a look at what it means to have a business credit card.
It Can Be a Good Thing
Yes, there are benefits to using a business credit card. First of all, when a small business is starting out, it can be difficult to obtain financing. In some cases, small businesses and start-ups can be approved for a credit card even when they are not approved for other types of financing. Aside from that, a business credit card is a great way to build business credit and regulate cash flow when necessary. In fact, Forbes reports on the results of a survey conducted by the Corporation for Enterprise Development, which concluded that businesses that use credit cards to help manage their expenses had better cash flow.
With this in mind, is paying bills a legitimate use of a business credit card? The short answer is yes, it can be—provided the card is used responsibly and the overall financial health of the business is good. By setting up regular bill payments, whether those are bills related to office expenses or to pay supplier invoices or other types of expenses, the card will be in regular use. This regular use will ensure the account remains active, preventing it from being shut down, which would negatively affect the company’s credit rating.
However, it is important to choose which bills to pay via credit card with care. Forbes reports that a business should not carry a balance of more than 30% of their credit card limit. Therefore, select the bills that:
- Are due at the most awkward time of the month
- When paid via credit card, will most effectively free up cash flow
- Are small enough that the credit card balance can be paid off in full before interest is charged
- Are for recurring payments with specific vendors, for example an online subscription service where manual invoicing is not possible
And above all, remember that a credit card can easily become a liability, which is why it is important to use it wisely.
Tips for Business Credit Card Use
Now that we have established that using a business credit card doesn’t necessarily amount to a poor business practice, there are a few things you should know about using one. The following tips are designed to help you manage your business credit card so that it doesn’t turn from a convenient asset into your worst financial nightmare.
Do Your Homework
Just as when applying for a personal credit card, be sure to check your options when applying for a business credit card. Check the following:
- Interest rates
- Annual fees and other fees
- Whether there are rewards associated with the use of the card
- Whether there is an introductory period and what happens when that period is over
Make sure you can manage all associated expenses. Also, be aware that the interest rates and fees associated with a business credit card can be higher than those for a personal card.
Treat It as a Form of Loan
Really, when you use a credit card, it is a loan—it’s money you have to pay back. So, pay it back. Make your payments every month, just as you would for any other loan. Ideally, you haven’t spent more than you can pay off each month, which will help you avoid interest charges.
However, if you cannot pay off the entire balance, then make at least double the minimum payment to help pay it down more quickly and minimize the amount of interest you will pay.
Determine Who Gets One
If the business just employs the business owner, this really isn’t an issue because there will only be one card to manage. However, if the business has additional employees, it is important that you consider very carefully which of the staff members will have a card. Remember that the more people who have a card, the more difficult it will be to track and control card usage.
Hold Everyone (Including Yourself) Accountable
Ensuring strict accountability will help make sure out-of-control spending is never an issue. There are a number of accountability measures that can be put into place, such as:
- Pre-approval of all spending
- Requiring receipts for every purchase made
- Setting limits on the amount that can be spent per purchase/day
- Setting limits on what can be purchased via credit card
- Notifications that will alert you every time a purchase is made
The key is to ensure there is a system in place to manage credit card use before the cards even arrive at the office.
Establish Spending Policies
Prior to the issuance and use of business credit cards, whether you are a one-man show or have employees, it is important to establish spending policies associated with the use of the credit card. These policies will outline the following:
- Spending limits
- Permitted frequency of use
- Approved expenses for which the card can be used
- Receipt collection/expense reporting procedures
- Who is authorized to have a card
- Disciplinary action associated with misuse of the credit card
- The maximum amount of the business budget that will go toward paying the monthly credit card bill
- Who is liable for the expenses incurred on the credit card account (particularly if there are other partners in the business)
Ensure the policy is in writing and that every person authorized to use a credit card has read and signed the policy. One copy will go to the cardholder and one will be kept at the business’ head office.
Finally, it is critical that all credit card spending is monitored. Many business credit card accounts come with the ability to:
- Assign individual spending limits to employees who have cards
- Track and receive notifications for each credit card transaction in real-time
- Access online/mobile banking and credit card statements
Just be sure that you follow up if there is a misuse of the credit card and be sure to thoroughly check every credit card account statement to verify that every purchase was authorized. If there is a case of misuse, follow through with disciplinary action immediately. Otherwise, the precedent is set and it will become even more difficult to control spending.
Although a credit card might seem like a necessary evil, rest assured that it does have its benefits when it comes to running a healthy business. As long as the credit card is used for regular bill payments and the balance carried forward is kept at no more than 30% of the credit limit, the business should be able to manage.
In fact, using a business credit card to make bill payments is a legitimate and even preferred method of managing business finances and cash flow. The key is to ensure the business is financially healthy, because the last thing any business owner wants is to be using a credit card, or any other form of financing, strictly to keep a struggling business afloat.
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