Business credit cards are generally issued in your company's name and used to carry out business expenses. You repay the outstanding debt using company funds, which impacts your company's business credit score.
Business credit scores are different from personal credit scores. Furthermore, defaults on a business credit card won't make you personally liable for any defaults, but the company. Today, business credit cards are available for nearly all types of businesses, be it large corporations and limited liability partnerships (LLP) or sole traders and freelancers.
However, using them for personal expenses might not be a good idea. While it is technically not illegal in the US, the consequences can go beyond your company to affect your personal finances and credit scores.
Account Closure
When you opt-in for a business credit card, there's a high chance that the terms and conditions of the agreement bar you from making personal purchases using it. Businesses, especially sole proprietors and freelancers, can sometimes find it difficult to avoid making personal purchases using their business credit cards.
The consequences can be that the lender may freeze your credit limit, restrict the use of certain features, and even close your account. Such actions on your business credit card account will likely make securing a new credit card challenging.
While a single personal purchase may be okay, frequently using your business credit card for shopping and groceries creates a pattern that your card issuer may take notice of. Once they do, it'll be flagged and can lead to further investigation. However, the rules and consequences may vary for each lender.
Challenges Around Taxes
When you incorporate a business and secure a business credit card, you unlock many tax benefits. First off, almost all business expenses are tax-deductible. Furthermore, when you swipe a business credit card, you can deduct high-interest payments and fees from your annual taxable business income.
However, personal expenses made using your business credit cards are not eligible for tax deductions, costing you good money in missed tax benefits over the long term.
Moreover, mixing up business and personal expenses makes it difficult to file taxes accurately. While your credit card company might not take heed of any personal expenses in your business tax returns, the IRS can be a problem if they audit you.
Impact on Business Growth
Mixing up personal and business expenses makes bookkeeping a cumbersome task. Suppose you are unable to maintain accurate business cash flow records. In that case, it becomes difficult to address business challenges, pinpoint underperformance, monitor business health, improve business credit scores, and grow at scale.
Keeping personal and business expenses separate also helps you identify business segments where you might be losing money and can trim operational overheads.
Swiping your business card for personal needs also lowers the capital (credit limit) you secured to support and sustain the business.
You Become Personally Liable For Business Defaults
It is very common for lenders to make business owners, especially new ones or those with small operations, sign personal guarantees before they can offer business credit cards.
A personal guarantee makes you liable if your business defaults on pending payments or runs into legal trouble. Hence, forcing personal expenses on top of your business purchases using your company credit card increases the outstanding debt and your liability to repay them personally if your business can't.
Meanwhile, if you have ideas for boosting your credit score with your business credit card, don't try it. Yes, transactions and repayments on your business credit card are reported to credit bureaus, but entries are not made on your credit profile but on your business credit profile.
Simultaneously, not repaying personal expenses on your business card on time will impact your personal credit score, especially if you have signed a personal guarantee.
If you have accidentally used your company credit card for personal purchases, flag it so you don't include it in your business records. Repay those personal expenses as early as possible. If you work in a large corporation, you can report it to the higher-ups to contain any potential auditing risks.
