Are you thinking about getting a credit card for your business? Here the 5 best tips for using business credit cards and ways to avoid incurring debt.
1 | Define the goal and purpose for getting a credit card
Getting a credit card should not be a replacement for your cash flow shortage problem. A credit card should complement your surplus cash flow and business profits. It should also be a way to establish your business creditworthiness, protect your bank debit card in case of fraud, and fuel business growth.
Satta Sarmah-Hightower from Cardratings.com says the “upside to having a business credit card is that if you use your card responsibly, you could improve your score and get lower interest rates in the event you need to take out a business loan. If your card issuer reports your business card activity on your personal report, this could improve your credit score.” (Source)
If you have a bad habit of not paying off your bill in full each month and can’t control your spending, you need to stick to using a bank debit card. The key point to remember is to do your homework on the different card options and truly assess your reason for getting a credit card.
2 | Choose the right business credit card
So you have made the decision to get a credit card for your business. The next phase of the process is figuring out the credit card would work for your business. There are so many options to choose from so use the recommended 5 simple steps from NerdWallet to select the best credit card.
Get the credit card with the lowest annual fee, best rewards or travel points for your purchases and one that has no personal liability requirement. You will also want the flexibility to add multiple employees to the account. I have always found American Express Business credit cards to be the best and their customer service is top notch compared to other card providers. Check out more credit card options from NerdWallet’s 2018 list.
3 | Use 3 Questions to Evaluate Every Purchase Decision
For every purchase decision you decide to make using your credit card, ask yourself these 3 questions to avoid the debt snowball:
Is this purchase necessary?
You want to avoid buying products and services you don't need just to be in the cool crowd.
Is this purchase already included in my budget?
Think of a budget as a revolving guideline to keep you within your means of spending based on the revenue you generate each month. If you didn’t factor this expense into your budget and didn’t add a cushion line item for extra spending, do not use the credit card. When you spend more than your budget, 9 times out of 10, you will more than likely end up with a cash flow deficit.
Do I have the designated cash to pay for the purchase right now without having to cut back in other areas?
Figure out if you have the available cash to make the purchase without having to cut corners in other areas. Using a budget analysis review, if you haven’t generated your budgeted income for the month to cover your overhead and you also don’t have surplus cash flow, then it doesn’t make sense to make the purchase.
If the answer to any of the above questions isn’t an absolutely yes, take that as a sign that now is not the best time to make that purchase decision.
4 | Develop a written expense policy
A business credit card comes with the flexibility to give your employees cards while maintaining control. Per IRS guidelines, you are also responsible for keeping track of your business receipts for tax filing purposes and to prove your expenditure is indeed business related in an audit. This is why having a written expense policy is vital. An expense policy will help you stay within your spending limit and help you control your cash flow.
Your employee handbook should include your expense policy and provide detailed procedures of how employees should submit their expense reports. The expense policy should also include an IRS accountable plan dictating a receipt, business purpose, and authorization for purchase is required for reimbursements.
5 | Enforce your expense policy using a receipt management system
Once you have your expense policy written, digitize it and make it user-friendly for your team to follow at all times. I recommend using a mobile expense tracking system like Expensify or Tallie to track all of your receipts, sync to your accounting system for record keeping and be readily available for an audit.
Implementing the above 5 best tips for using credit cards will help you avoid incurring unnecessary debt. Don’t hesitate to reach out to me if you need help implementing Expensify or Tallie expense management system.
What other tips would you recommend for using business credit cards? Leave a comment below.