A credit card account can help you cover operating costs, build credit for a growing business, and have a financial cushion for unforeseen expenses. Although credit cards are easier to obtain than traditional loans, they carry higher interest rates, so without a proper system in place to control spending, it’s easy to rack up debt. To protect your business and get the most benefit from this financing option, follow these four tips for using business cards responsibly.
Keep It Strictly Business
Resist the temptation to use business credit cards for personal spending, even when you run a single-person enterprise. Keeping personal purchases separate makes it easier to itemize business expenses and claim deductions when tax time rolls around. If you issue secondary cards to employees, provide clear guidelines on what qualifies as a business expense. Set up a system of accountability by requiring staff to get approval in advance and turn in receipts. You can also use account alerts to stay up-to-date on employee spending.
Document Your Spending Policy
Think like a creditor, and draft an official policy describing the conditions of using a corporate credit card. When you put everything in writing and give staff a copy, they know exactly how to keep up their end of the partnership. Only issue cards to employees once they sign the policy. Showing your entire team that everyone has to follow the same rules can prevent claims of favoritism. To keep spending under control, decide who needs a credit card before giving one out. Most employees probably don’t need to make regular purchases on the spot, so you can handle their requests through your business bank account. Whether you choose to give cards to all senior staff or client account managers, be transparent and consistent with your criteria, and include it in your written policy.
Enforce Spending Limits
Set spending limits to prevent impulse purchases. These guidelines show employees that you’re serious about money management while eliminating any gray area about appropriate purchases. In your spending policy, clarify the maximum amount employees can spend and how frequently they can make purchases. Of course, a standardized policy doesn’t work for every business situation. Let’s say you need to set different limits for individual employees. It’s beneficial to choose a credit card that lets you put restrictions directly on the account. Then, you can restrict one cardholder to specific categories and limit another to certain weekdays or dollar amounts.
Limit Cash Advances
Getting cash advances on your credit card may seem like a convenient way to withdraw physical money, but it can lead to higher fees and interest rates. Keep advances to a minimum by restricting them to your primary account and not allowing staff to use this feature. Ideally, business credit cards should be a way to increase short-term cash flow when your sales are low. With this in mind, you don’t want to spend close to your card limit and have no available funds when you really need them. To avoid risky spending habits, aim to use cash from your debit account or business loan for large purchases that could eat up your credit card balance. If you charge a large purchase or use a hefty cash advance, a few bad weeks or months could pile on the debt. Whenever possible, commit to only spending a percentage of your credit card limit, such as 20% to 40%. That way, you protect yourself from a cycle of overspending and never become too dependent on cash advances.
Protect Your Financial Well-Being
Treat corporate credit cards like any budget, and be diligent about tracking expenses and sticking to limits. Business credit can be an asset if you use it to maximize your buying power, drive growth and increase profit. Take preventive measures to protect yourself from excessive debt by checking your statements regularly and investigating errors and questionable staff purchases as soon as you spot them. Spend time documenting and organizing your business credit expenses today, so you can simplify your taxes and financial reporting in the future.