Have you ever wondered whether you can use your business credit card for personal expenses?
It’s a common question among business owners, but the answer can be a bit tricky.
While we can’t give legal advice (if you need that, please talk to your attorney and your CPA), we’re here to provide you with helpful information that can guide you in making informed decisions for your business — One interesting thing we found out is that using your business credit card to pay yourself a salary as an employee of your own business can be considered a legitimate expense.
Pretty cool, huh?
We’ll delve into this and other commonly asked questions about business credit card use in this article, so keep reading to find out more!
Here’s what’s in store:
- Scenario: Employee Uses Company Credit Card for Personal Use
- General Rules for Business Credit Cards
- How Business Credit Affects Personal Credit
- Conclusion: Is it Illegal?
Let’s rock and roll!
Scenario: Employee Uses Company Credit Card for Personal Use
While most of our content is targeted at business owners, you might be reading this because you’re wondering if you can add a pair of shoes to your business order, and still pay with your company’s corporate card. Here’s what I can tell you.
When an employee uses a company credit card for personal expenses, it can cause a lot of problems.
First off, it’s usually against company policy, which means the employee could face some serious consequences like getting in trouble with the boss or even losing their job. From a legal standpoint, this is risky for all parties because if the expenses are shady or illegal, both the employee and the company could face a run-in with the law.
Next, staff members that use a company’s card for non-business expenditures can complicate finances because it’s hard to keep track of personal expenses and separate them from business expenses — it could cause some major issues with taxes and budgets down the road.
Lastly, if personal spending exceeds the credit limit on the card, it can result in fees or penalties, which will hurt the company’s bottom line.
Image source: Reddit
So, if you accidentally used a company credit card when you didn’t intend to, or if you notice that an employee used your business credit card for something questionable, it’s best to act fast.
How to Prevent Personal Spending on Company Credit Cards
Q: Why does our Amazon business report show an order for a gold-plated toilet seat?
A: Someone wanted to feel like a VIP on the company’s dime.
In all seriousness, it’s crucial to make sure that employees use company credit cards responsibly and only for legitimate business expenses. Otherwise, the company could end up footing the bill for some pretty outrageous purchases!
Here are some actions you can take to avoid personal employee spending on your business credit cards:
- Create clear policies — Make sure everyone knows the rules when it comes to using company credit cards. This means setting out clear policies on what expenses are allowed and what expenses are not allowed.
- Set spending limits — Give your employees some guardrails by setting limits on how much they can spend with the company credit card. You can also set daily or weekly limits to help control spending.
- Monitor transactions — Keep a close eye on credit card transactions to make sure there are no unauthorized or personal expenses. This means setting up alerts to notify you of any unusual transactions or spending patterns.
- Require receipts — Make sure your employees know that they need to submit receipts for all credit card expenses. This helps ensure that all expenses are legitimate and for business purposes.
- Provide training — Never assume that everyone just knows how to use a company credit card. Provide training that covers your company’s spending policies, guidelines, and best practices for managing credit card expenses.
By doing these things, you can help prevent personal employee spending on company credit cards…. and ensure that all credit card expenses are legitimate and for business purposes only.
General Rules for Business Credit Cards
First and foremost, you need to understand that business credit cards are intended for business expenses…legit ones! This means that you should only use the card to pay for things that are related to your business, like office supplies, travel expenses, and other business-related costs.
Next, it’s vital to keep your personal and business expenses separate (i.e. you should never use your business credit card to pay for personal expenses, like groceries, clothing, or personal entertainment).
On a similar note, you need to keep track of your spending. You should monitor your credit card statement regularly to ensure that all charges are legitimate and for business purposes. When issuing business credit cards or corporate cards, it’s also a good idea to set spending limits for yourself and your employees to prevent overspending.
Lastly, be sure to pay your credit card bill on time and in full every month — Late payments can devastate your business credit score and result in hefty late fees and interest charges (remember, you should credit card funds to invest in assets, not squander on liabilities).
Note, that business credit card policies vary between credit card companies and businesses have a right to set unique spending policies within legal guidelines in their jurisdiction.
By following these general rules, you can use your business credit card responsibly and avoid any potential issues down the road.
What Can You Use Business Credit For?
In a word, you need to use your business credit for business expenses.
However, in some industries, expenses that seem frivolous can be completely above board — for example, stylists in the beauty business need to look nice, so they can buy makeup, clothing, and haircare products. And, for businesses with dress codes, you might have a green light on that Armani suit you’ve been eyeballing.
So, what constitutes a business expense?
A business expense is any cost incurred as part of running your business, most commonly:
- Rent for your office space
- Equipment purchases
- Employee salaries
- Marketing expenses
- Travel costs.
In addition to these more obvious expenses, there are also many other items that can be considered legitimate business expenses, depending on your industry and specific needs. For example, as previously mentioned, in certain industries, expenses like clothing, makeup, and hair care products can be considered legitimate business expenses.
Other examples might include:
- Home office expenses
- Professional development courses or certifications
- Certain meals and entertainment expenses (if they are related to business activities)
It’s important to note, however, that not all expenses will be considered legitimate business expenses. Any personal expenses, such as vacations or personal entertainment, should never be charged to your business credit card.
In general, it’s always a good idea to consult with a financial professional, like an accountant or tax advisor, to ensure that you are using your business credit card appropriately (and taking advantage of all eligible tax deductions).
Paying Yourself With Credit When You Own a Business
As a business owner, there are a few different ways you can pay yourself. One common method is to pay yourself a salary, which you can do using a number of different payment methods including checks, direct deposit, or even a credit card.
Yes, you read that right – you can pay yourself a salary with a credit card!
Now, before you go swiping that plastic, it’s important to understand the pros and cons of each payment method.
For example, paying yourself with a credit card may be convenient, but it can also come with high interest rates and fees if you don’t pay off the balance each month…while other payment methods like checks and direct deposit may be more traditional, they might also require more effort and may not be as flexible.
Regardless of which payment method you choose, it’s important to manage your business finances wisely:
- Create a budget
- Keep track of expenses
- Set aside money for taxes and emergencies.
By taking these steps, you can ensure that you are paying yourself in a sustainable way that supports both your personal and business financial goals.
In general, it can be illegal to use business funds for personal use, especially for employees whose companies prohibit it; this includes paying personal expenses and withdrawing cash from a business account to spend on personal items.
How often people get caught doing this, I can’t begin to guess. And, the penalties would surely vary depending on the severity of the crime — which is why you should consult with an attorney or CPA to ensure legal compliance.
Using business funds for personal expenses can sometimes be considered embezzlement or fraud, and can result in serious legal consequences…It can also damage your business’s financial stability and reputation.
That being said, in my experience, there are some exceptions to this (like a business owner paying their own salary).
How Business Credit Affects Personal Credit
As a business owner, you need to understand the relationship between your personal and business credit. While they are technically separate, your personal credit can still impact your LLC in a few different ways.
If you have a poor personal credit score, it may be harder to get approved for business loans or credit cards…On the other hand, a strong personal credit score can make it easier to access funding and other resources for your business.
To manage both your personal and business credit effectively, there are a few key tips to keep in mind:
First, make sure to keep your personal and business finances separate as much as possible: open separate bank accounts and credit cards for your business and avoid using your personal credit to cover business expenses.
Next, be sure to monitor your credit scores regularly and address any errors or issues that arise promptly.
And, you need to maintain a good credit utilization ratio – that is, the amount of credit you are using compared to the amount you have available…Both personal and business credit scores are impacted by this ratio, so it’s important to keep your balances low and avoid maxing out your credit cards.
Recommended: Credit Secrets: Can You Erase Bad Credit History?
Is it Better to Use Business Credit Card Points for Personal Things?
While I wouldn’t encourage you to spend business credit on personal items, rewards redemption is another story.
Using your business credit card points for personal things can be a tempting proposition, especially if you’ve been racking up rewards points with your business purchases.
I’ve redeemed my Marriott Bonvoy rewards on more than one family vacation.
However, whether it’s better to use those points for personal use ultimately depends on your business’s financial situation and your personal financial goals.
Here are some things to consider:
- If your business has a cash flow problem and you’re relying on credit card rewards to make ends meet, it’s probably not a good idea to use those points for personal purchases. Instead, you should focus on using your rewards to offset your business expenses.
- On the other hand, if your business is doing well and you have plenty of cash on hand, using your rewards for personal purchases can be a great way to enjoy some extra perks. Just be sure to keep careful track of your expenses and make sure you’re not putting your business at risk by overspending.
- If you have a specific personal financial goal, such as saving up for a down payment on a home or a car, using your business credit card rewards to help achieve that goal can be a smart move. Just be sure to weigh the potential benefits of using your rewards against any fees or interest charges associated with cashing them in.
The bottom line is that you should consider the financial health of your business and your personal financial goals before making a decision.
Conclusion: Is it Illegal?
I’ve already said this a few times, but I would rather sound like a broken record than steer you down the wrong path: when in doubt about business credit spending, consult an attorney or CPA.
The short answer is that business credit spending for personal use can be risky and it’s likely to complicate your business budget. Yet, there are plenty of totally above-water business credit spending categories you might not have considered (paying yourself a salary) — I tried to cover them here.
If you want to learn how to obtain up to $100K in business credit in as few as 30 days, join Business Credit Workshop today.