Best Practices for Managing Small Business Credit Cards
For most small businesses, a credit card is an indispensable resource for managing procurement.
- Many vendors prefer credit card payments
- The convenience of credit cards make it easy to purchase for the business on the spot
- Credit cards help you manage your expenses against your cash flow
- Most business credit cards offer perks and rewards that can add value to your business
- Handled the right way, they can improve your company’s business credit rating
While often seen as a necessity, business credit cards are not without risks. If you mishandle your company credit card, you could run into some real trouble.
- It’s tempting to buy everything up front rather than waiting until you can afford it, which could leave you in deep debt
- Credit card interest should be money in your pocket, not the bank’s
- Bad credit card habits can have tax implications (failing to keep receipts, commingling funds, etc.)
- Business credit cards aren’t covered by the same consumer protections as personal credit cards, which could increase your risk
- Just like credit cards can help your credit rating, mishandled credit cards can damage it
In order to reap the benefits and reduce the risks of small business credit cards, follow these best practices:
Pay your full balance
Most business credit cards allow you zero interest as long as you maintain a zero balance each month. The day you allow your business to carry a balance, is the day you start paying interest. It can also make it harder to pay down the balance next month, which could lead to a slippery slope of growing credit card debt.
Pay on time
Miss the payment due date, and you’ll trigger a late fee in addition to the interest. On top of that, you’ll risk your interest rate going up and a ding on your credit. The remedy is to be organized. Don’t let your bills build up. Instead, establish a rhythm for paying bills. For example, designate every even-numbered Friday as a payday for any outstanding bills.
Do not commingle funds
As a business owner—especially if you’re a sole proprietorship—it can be tempting to use your business credit card for personal purchases. Commingling business and personal funds has the potential to negatively impact contracts and grants, cross ethical boundaries, make tax reporting difficult, or in some cases, may even be against the law. It’s sound business practice to avoid commingling funds altogether.
Keep it secure
With all the other things on your plate, do you really want to deal with credit card fraud, too? When not in use, be sure to keep your business credit card in a secure location. While it seems obvious, many small business owners forget that physical security of your office is important.
If you have employees that require a credit card for work, the best practice is to provide each person an individual card. Everyone else should never touch one. That way you can track exactly where misuse is occurring. Of course, that’s not perfectly practical for every small business. So be smart. Don’t make it easy for others in your office space to access the credit card without explicit permission, and make sure that they promptly return it.
Have a policy for when to use cash vs. credit
The best way to avoid overspending on your credit card is to have a plan. You don’t always need to use your credit card. You can pay from your business checking account or petty cash, too. Strategize what will work for your business, and establish how you and your staff will know the rules.
Famously, Dave Ramsey of EntreLeadership recommends small businesses stay debt-free. This means never using a credit card, but instead sticking to cash. While that can work for some, it won’t necessarily work for all businesses. However, given the risks associated with mismanaging credit cards and out-of-control business debt, it’s worth considering.
Review your statement
Unless you have a CPA on staff, statement review can be a major pain, and it can be easily overlooked. Nonetheless, statement review is one of the best ways to catch fraudulent charges. If you allow others in your business borrow the card, then it’s a must.
Go a step further: reconcile your receipts with your statement, and file them together. This will help you stay organized for tax time.
Keep your receipts
Since we’re on the subject of receipts, remember the old adage: You can’t deduct what you can’t document. Your credit card statement alone isn’t sufficient backup for tax purposes.
Don’t be lazy about retaining receipts. Have a place you file them so that they’re handy when it’s time to reconcile your statement.
Finally, the most important best practice is simple in theory, but often difficult in practice: don’t overspend.
The way to avoid overspending is to know your limits, which means creating a budget and sticking to it. To stay on top of your limits, run quarterly cash flow projections, and monitor your revenue against your projections. This way, you can safely keep your business in the black while keeping your credit card payments under control.
Handled the right way, a credit card can be a huge asset to your business, adding convenience, providing procurement coverage when you need it, and helping you track expenses. And when you follow business credit card best practices, you’ll avoid the common pitfalls that have been the bane of many a small business.
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