Best Practices for Small Business Credit Cards
A business credit or charge card can be helpful for business owners when it comes to making purchases and paying expenses on behalf of your business. However, it’s extremely important to develop best practices when it comes to managing and using these cards.
When applying for a business credit or charge card, determine the type of card that best suits your business needs. A business credit card, just like a personal credit card, will offer you a fixed credit limit and the ability to pay over time while a charge card will have no preset spending limit (not to be confused with unlimited spending power) and will typically require the balance be paid in full each month though some cards may allow for pay over time. It should go without saying that you should only spend what you can afford so that you can afford to pay your monthly bill in full every month. Paying over time will not only cost more in the long run (due to accrued interest) but also set you and your business on the path of accruing unnecessary debt.
As a startup or small business, you’ll want to find cards that offer no annual fee while still offering some bang for the buck (ex: sign-on bonuses, cash back rewards, points for every dollar). As your business grows, you may need to upgrade or switch to a different card that offers you greater benefits and rewards, but keep in mind that you may need to pay an annual membership fee to gain some of those added benefits and rewards. While paying an annual membership fee won’t necessarily break the bank, don’t go off and get a credit/charge card with a $400 or $500 annual fee if the value of the benefits and rewards do not help offset the cost of the annual fee.
A business credit or charge card, unlike a personal card, is intended for legitimate BUSINESS expenses only. Do not get into the habit of mixing business and personal expenses on a business credit or charge card. Cardholder agreements will usually state that business credit or charge cards are only to be used for business expenses. While card issuers may not audit every transaction made on a business credit or charge card, failing to keep your business and personal expenses separate can pose risks and liabilities including piercing the corporate veil and you could face penalties if your business were to undergo an audit by the IRS (ex: treating personal expenses as deductible business expenses). Just don’t do it!
If you are planning on issuing additional business credit or charge cards to employees, be sure to limit the number of cards to only those employees who absolutely require one for legitimate business purposes. Also, be sure to have written policies in place on the proper use of business credit or charge cards. Make sure every employee understands the current policies in place and provide refreshers as needed. As part of your written policies, you may want to include a policy requiring employees to obtain pre-approval or pre-authorization by management before any charges are placed on a business credit/charge card and/or set spending thresholds which require additional management approval.
Make sure that for every transaction on the card, there is a corresponding receipt for the purchase. You should also require that a monthly reconciliation (ex: expense report) for each card be submitted along with copies of all the corresponding receipts for the applicable charges. Be sure to thoroughly review every monthly statement for accuracy and to protect against fraudulent charges. It can also be beneficial to enable alerts on each card and on the master card account and to frequently monitor transactions on the cards. All card issuers should have an online dashboard which allows you to monitor all the card accounts and transactions on your master account.
With some business card accounts, card issuers will allow you to select billing options for your cards. For example, one option would be to receive a single master bill for your business credit/charge card account with a breakdown of each individual card and the respective charges. The business, upon reviewing and reconciling the statement, can then pay the master bill each month. Another option would be to have individual credit/charge card bills issued to each cardholder. Each cardholder would then be responsible for paying their respective bills and then submit those expenses back to the business for reimbursement. The latter option would add an extra layer of protection for the business to prevent and deter unauthorized spending on a card.
Business credit and charge cards can be a useful and vital tool in helping a business owner manage and run his/her business, but like anything else, they must be used properly and responsibly.