Business credit cards are a powerful tool to manage the ongoing costs associated with running your business. Supply to buy, payment vendor, operational costs to process.
Sometimes, the line between your business and your personal life becomes blurry in the midst of trying to take care of things. So, what if you take care of your personal shopping with your business credit card?
It is not illegal to technically place personal purchases on your business credit card. However, making a personal purchase with a business credit card may violate the terms of the card agreement. This can have serious consequences.
While it is recommended to separate personal expenses and business expenses, here is what you need to know if you will accidentally request a personal purchase on your business card.
Results of using business cards for personal expenses
Obtaining a business credit card can be easier than obtaining a consumer credit card. Even if your business is not registered or fully operational, you may still be eligible for business cards. Also, while using a business credit card for all expenses may be attractive, it is important to only charge a business card.
Mixing business and personal expenses complicates spending at several different levels. Besides creating accounting headaches, if you are trying to build business credits, you are also deprived of funds to help your business thrive and muddy waters.
Using business cards for personal expenses can cause account issues and can negatively affect your ability to earn credits in the future.
Your account may be closed
If you have been approved for a business credit card, you agree to the terms and conditions associated with using your account. Most business credit card providers must agree not to use their cards for personal expenses. If you break this rule, they have the right to cancel your card.
For example, the terms and conditions of InkBusiness® Credit Card Status: “By becoming a business card card member on a visa, you agree that the card is used for business purposes only and that the card is issued to a public or private company that includes the sole owner or employee or contractor of the organization.”
The terms and conditions for BusinessPlatinumCard® on American Express are similar and stated in all caps.
By submitting this application you represent that all cards issued in your account will be used for commercial or business purposes only.
If the card issuer notifies you of a pattern of expenses other than normal business spending, it may send a red flag. If you use a business credit card for your personal spending, you are opposed to the terms and conditions of the card, which are the basis for closing your account.
You may be personally responsible
Mixing individual and business finances will result in personal liability for business debt if the business falls into legal trouble.
“There’s a risk when you mix your personal and business funds, as the courts can penetrate the veil of the company and hold you personally responsible for your business,” says former credit industry analyst Greg Manken.
Most credit card issuers must sign a personal guarantee before authorizing a business credit card. For the guarantee, Mahnken said, “As we are almost certainly liable for the balance of our business credit card, charging a large individual purchase poses the same threat as large business expenses.” Adding personal expenses to your business card is not worth the risk of liability.
Consumer protection for purchases is limited
If you use a personal credit card, you may lose protection on certain purchases you would have. This is because business credit cards are not regulated by the same laws as consumer credit cards.
Many of the credit card accountability and disclosure laws (card law) protections do not apply to business credit cards, including:
- Preventing interest rate hikes without notice
- A ban on interest rates means an increase in existing balances
- Prohibiting interest charges on debts paid on time
- Apply payments to the highest interest rate claim first
Another concern when purchasing with a business credit card is that it can be difficult to challenge the fees. Fortunately, the time slot to challenge prices is longer than the time for personal credit cards. It also may have less protection for the way debt collectors choose to process their collection.
Both your personal and business credit scores will be affected
You may want to use a business credit card for individual purchases to help build consumers’ credit scores. This may sound like a good idea on the surface, but it probably won’t bring you the results you’re looking for. This is because most business credit cards only report to the Business Credit Bureau. The profits you earn from your business credit score may not be transferred to your consumer credit score.
However, if you are unable to pay back your business credit card at personal expenses, your personal credit score may be a hit. This is because of personal guarantees you will sign before receiving your business credit card. “If you can’t pay back your balance, your personal credit will probably suffer,” says Mahnken.
You’ll pay more in the long run
Business credit cards usually have higher rates and higher interest rates. These higher fee trade-offs are the business expenses themselves, along with the interest and fees of most business purchases being tax-deductible.
However, individual purchases are not tax deductible. This means you don’t benefit them. So making a personal purchase with a business credit card and maintaining your balance costs more in the long run.
It’s difficult to track business expenses
Tracking business expenses can help you understand where your business is growing and where you are losing money. In doing so, it also provides ideas for where you can reduce your main spending and costs.
Adding personal and business expenses to the same card makes it difficult to understand the needs of your business and its overall financial health.
“Even if you try to filter them, your personal expenses can distort your business reports and make it extremely difficult to see how well your business is (or poor),” says tax advisor Michael Xstein.
Reliable recordkeeping is also important when applying for a business fund, whether it is a loan, grant or business credit. If your personal finances are mixed with your business finances, you may find it difficult to get funds – you may not be able to do that until you clean your account.
Your taxes become more complicated
Most business expenses are tax deductible. Personal expenses aren’t. Mixing the two can complicate tax filing and create even deeper issues if the IRS chooses to audit.
Let’s say you’re on a business trip, including family vacations. Meanwhile, you will be billing some dinner with your business credit card. Some of those dinners are with clients and some with family. When it’s time to document your expenses, it can be difficult to tell dinner apart.
Credit card companies may not be able to catch mistakes, but the IRS is taking more care. Additionally, if the costs are audited after the application, you will be subject to a penalty or tax.
What happens if I accidentally use a business credit card for personal expenses?
An accident can occur and damage can be repaired. First of all, make sure you flag individual purchases so that they are not included in your business bookkeeping.
Second, pay back your personal expenses as soon as possible so that you don’t leave your credit balance available for your business. If you are not the sole owner of the business, you should consider how to report the error to people and teams who need the business.
Conclusion
Charging personal expenses on a business credit card is not against the law, but may be against the terms of your credit card agreement. The results of this include account closures, personal liability, tax implications, more complex bookkeeping, and negative impacts on both personal and business credits, and the likelihood of higher interest.
If you inadvertently claim something personal on your business card, take steps to notify the relevant parties. And make sure you flag it so that it’s not included in your business accounting.
