One of the major reasons small businesses should get a business credit card is to separate personal expenses from business expenses. Generally, business expenses are tax-deductible, and you need to have a clear cut between personal and business expenses so that it can be much easier during tax time. While these cards are convenient to use, it is also essential to understand the implications of using them for personal expenses. In this article, you will be able to know whether you can use a business credit card for personal expenses and what the consequences might be.
Can You Use a Business Credit Card for Personal Expenses?
Yes, mistakes can happen. You could swipe your business card for a personal purchase by mistake, or you may be in a dilemma and need to bail yourself out quickly. Legally speaking, no law prohibits the use of a business credit card or a business loan for personal expenses, but that does not mean that it is a good idea. Most credit card providers do not allow small-business owners to charge personal costs to their business credit cards. If you do, you may be violating the terms of your card member agreement, which could result in repercussions.
What Happens If You Put Personal Expenses on a Business Credit Card?
1. Your Account May Be Closed: One of the most immediate risks of using a business credit card or spending business loans for personal expenses is the potential for your account to be closed. When approved for a business credit card, you agree to the terms and restrictions for using your account. Credit card issuers monitor spending patterns, and if they notice unusual transactions that do not align with the terms and conditions, they may flag your account.
2. Complicated Accounting: Mixing business loans and personal and business transactions together will take more time untangling the knots. When you use a business credit card for personal purchases, tracking your business expenses accurately becomes challenging. During tax season, this can lead to confusion because you will struggle to differentiate between deductible business expenses and non-deductible personal ones.
3. Effect on Business Credit: Using a business credit card for personal expenses can also hinder you from building good business credit. Business credit is crucial when securing loans with favorable terms as your business grows. When personal expenses are mixed in, it can skew your business credit profile and make it difficult to assess your business’s financial standing. Your lenders and business partners may find it hard to trust you and your business since there is no clear distinction between your expenses and your business’s. To be more trusted, you should define your business transactions.
4. Legal Protections at Risk: If your business is structured as an LLC or corporation, then you should maintain a clear separation between personal and business finances, which is vital for protecting your assets.
What Happens If You Accidentally Use a Business Credit Card for Personal Expenses?
Accidents happen, and you might use your business credit card for a personal purchase. While this is generally not a cause for alarm, you should rectify the situation quickly. Here are some steps to take:
- Document the Transaction: Note the personal purchase and ensure it’s marked as non-business-related in your records.
- Reimburse the Card: If possible, reimburse the business credit card for the personal expense. This can help maintain the separation between your personal and business finances.
- Monitor Your Spending: Regularly review your business credit card statements to ensure that personal expenses do not become a habit.
- Educate Employees: If you have employees with access to business credit cards, ensure they understand the importance of using the card strictly for business expenses. This will help prevent accidental misuse and maintain financial integrity.
Conclusion
While using a business credit card or business loan for personal expenses is permitted, it is not advisable as it puts your integrity and ethical conduct in question. The potential risks, like account closure and complicated accounting, far outweigh the convenience of mixing personal and business finances. If you’re a sole trader, you may be able to use your business credit card for certain transactions. However, it’s essential to ensure they are all consolidated at the end.
