A business credit card is not a necessity but it does have many advantages for new business owners. It provides a specified amount of cash availability. It can help you determine the type of expenses you incur and how much it costs you for each specific category of expenses. Also, business credits often provide bonuses that are advantageous to business owners.
While this may seem alluring, there are disadvantages you should be aware of. If you do not know these drawbacks, you could end up being personally liable for debts incurred by your business. It is a typical mistake by many entrepreneurs not to consider both the advantages and disadvantages of a business credit card.
Business Card Drawbacks
A small business owner may not be aware that, when they are new to business and do not yet have a credit score, they may become personally liable for the business debt. Credit card lenders routinely insist that business owners with a company history of less than two years sign a personal liability agreement.
This means the owner becomes liable if, for instance, the company is late making payments on the account. This could adversely affect the owner's personal credit rating in accordance with the terms of the personal liability agreement.
In addition to the risk of personal liability, there are other risks that need consideration. Interest rates are usually higher than personal credit cards. Misuse of the credit card by a business employee for personal purchases can be a serious concern. This credit card may have less indemnifications attached to it because its purpose is business transactions.
Mismanagement Controls for Business Credit Cards
You can implement measures to prevent or minimize the disadvantages of the credit card. Mismanagement is only possible if proper procedures and precautions are not in place and followed.
This can be done by ensuring employees have the least possible credit limit. If you discover abuse of the card, report it immediately to the card issuer.
Keep a meticulous eye on financial transactions and review statements thoroughly. You want to keep your debt level as minimal as possible. This will also control interest charges.
Enroll with a business credit bureau. This will assist you with establishing a credit score. Plus this will negate the necessity of a personal liability agreement in the future.
When you begin your new business there is no way to bypass the necessity of the personal liability agreement. The best way to reduce your personal risk is to use your business credit cards prudently. Ensure payments are made on time. Most importantly, do not acquire a debt load greater than your business's ability to repay.
Credit cards can be beneficial for your business. You can take advantage of the opportunities they provide for improvement of your business, but you must always pay strict attention to your precautions against abuse or overuse.
A business credit card is an important factor in establishing a business credit score. Research your chosen card's pros and cons thoroughly, then use the card to help your business expand.