There are certainly a lot of perks to owning a credit card for your business. It is a quick and easy way to make purchases, and some cards have rewards or other bonuses for money spent. However, there are also some pitfalls to be aware of before you start putting your expenses on business credit cards. These are common mistakes that could potentially be a financial disaster for your business.
Interest rates on credit cards
The first thing you should be wary of when starting to us a business card is the interest rate. Many cards lure you in to using them with appealing offers such as no interest for the first year. While this is beneficial to help you kick start your company, these cards typically come with incredibly high interest rates after the first year. Nothing will eat away your potential profits faster than paying 15-30% APR on your business purchases.
Risking your personal credit
Another common pitfall associated with business credit cards is the risk to your personal credit. Many people mistakenly believe that when they open a business credit card, it is not linked to their personal credit. Although a new business begins with no credit history, simply using a business credit card does not establish credit for the business. Pay close attention when signing up for a business card, and you will likely see that in some cases, you must make a personal guarantee on the account. Many people miss this fact, as it is typically hidden in the fine print.
Because of your personal guarantee, you become fully responsible for all debt incurred by the business. You must make all payments on the credit card, regardless of how profitable the business is. This means that even if the business goes under, you are still responsible for all payments. If you cannot pay on time, any late payments will damage your personal credit history.
Personal guarantees should be considered and please contact a legal professional for advice. Do not agree to something you do not understand.
Monitor your spending and credit card account balances at all times
To best avoid these financial hardships associated with misuse of business credit cards, it is best to use your cards sparingly. Clearly there are some expenses for which a business card is actually more convenient, and in these cases, do not be afraid to use your card. These cards are valuable tools for any business. By keeping your business charges at a reasonable level, you should have little trouble using your business credit cards. Keep them at an amount that you are sure you can pay back, and these cards will be an asset to your business.
Visibility is key
At Expex our clients are small to mid-sized businesses with an up and coming concentration in startups. Startup businesses live in the throws of working so hard for growth and service that the amount of credit card debt can climb silently until there is trouble.
Expex created a simple dashboard providing visibility into a company’s bank accounts, credit cards and any other loans or accounts. Alerts can be set so you will be aware of excess spending and conversely low bank account balances.
Isn’t that worth a look? Contact us for a demo. We can help keep you company financially healthy.