Access to money is one of the most critical aspects of successfully operating a small business. As a business owner you need to finance the cost of equipment, compensate your employees and pay for the other materials and infrastructure needed to operate a business.
For the vast majority of small businesses, that’s where a credit card comes in. Credit cards provide a quick source of capital and make it simpler to manage business transactions than – for example – taking out a small business loan.
Because of this, many small business owners fall into the trap of using their personal credit card for business expenses. This can be a slippery slope that is not always in the best interest of your business. Here’s why:
It makes it more difficult for you to separate business expenses from your personal expenses. This in turn, makes it challenging to determine just how well your business is performing – for you, potential future lenders and the IRS. As a result, it could be more difficult to secure funding from bankers and creditors.
Comingling business and personal expenses will make filing your taxes a big challenge. If you try to separate all your records in March or April, you likely won’t be able to remember whether they were for personal or business purposes. If you separate them out from the beginning, all your income and expenses will be in one place, making tax filing easier. In addition, keeping good records year-long will give you proof of your business expenses if you do get audited.
By using your personal credit card for your business expenses, you are putting your own credit record on the line. If your business is going through a tough time an unpaid credit card bill would not only hurt the business but also your personal credit history.
Financing your business through your personal credit card can create challenges if you ever choose to sell your business. If you’re carrying business debt on your personal card, you may have to end up using the proceeds from your sale to pay off the debt. That essentially defeats the purpose. Bottom line – the less debt you carry when the sale takes place, the more you will walk away with.
Finally, if your business debts are associated with your Social Security Number, instead of a federal Employment Identification number (FEIN), you are missing the opportunity to build a credit history for your business. Having a well-managed business credit history can help you establish a solid business credit rating.
To separate your business expenses from your personal expenses, it’s best to establish a legal entity for your company. Work with an attorney to determine the best way to incorporate or structure your business.