Business owners often find that credit cards come with many benefits for their business. They can be convenient, allow for spending to be easily tracked online and on mobile devices, they can help you build credit over time, and often come with rewards and incentives for using the card. However, when credit cards aren’t used efficiently by business owners, they can be a catalyst in long-term financial hardships and liabilities. Recently, Forbes reported several common credit card mistakes that business owners should avoid.
According to Forbes, four credit card mistakes business owners should avoid are:
Accruing high-interest credit card debt on an untested concept.
Business credit card debt is easy to accrue but, oftentimes, difficult to pay back. This is often due to the high interest rates credit card companies charge when debts go unpaid. For this reason, it is a risk for business owners to use credit cards to finance untested concepts. When these ideas do not generate a return on investment, business owners are left holding the bag.
To avoid this mistake, business owners and investors should consider only using credit cards on already-proven concepts that provide more financial security. Stephanie Bacak, a certified financial planner and founder of Capstone, said in her interview with Forbes that she recommends business owners and investors test ideas to gain feedback and gauge interest.
Giving credit cards to employees without setting clear limits.
In some instances, it may be convenient or even necessary for business owners to give their employees credit cards. Oftentimes, it makes it easier to delegate errands relating to the business. However, it is important that if credit cards are given to employees, that business owners set a clear spending policy for business-related purchases. Not only can over-spending dip into profits, but debts can hurt the business’ credit score and potentially personal credit scores as well. A low credit score can make it difficult to secure loans or other forms of credit down the line.
To avoid this mistake, business owners should secure a small-business credit card that allows him or her to set limits on spending and set up spending notifications. If purchases exceed a specific dollar amount, the business owner will receive an alert. Employees should be made aware of the spending policy and expectations prior to receiving the card.
Banking on tax deductions to justify credit card overspending.
Oftentimes, business owners will justify big business spending by saying that he or she will write it off as a tax deduction. However, it’s important to remember that a “deductible” isn’t the same as “free.” While a deduction is helpful, it doesn’t take away the expense. In addition, while expenses may reduce net income and tax liability, a business owner will still need to pay taxes on remaining income in addition to the credit card bill.
To avoid this mistake, businesses should not be spending more than they make. Businesses, especially startups, that fall into a pattern of overspending may eventually find themselves in financial hardships down the road. For those that do fall into this pattern, it is important to evaluate spending and look for opportunities to cut costs. According to Forbes, deductions should not be part of your spending strategy.
Using the same credit cards for business and personal use.
Many businesses are set up as limited liability companies (LLCs) to limit personal legal exposure. However, if a business owner does not separate personal credit cards from business credit cards, an LLC may not provide much liability protection.
According to Jamie Lieberman, partner and founder of Hashtag Legal who was interviewed by Forbes, stated that although not common and standards vary state to state, if a business is sued and the court decided that the business’ LLC was not valid due to the owner not following certain formalities, he or she may be held personally liable.
To avoid this mistake, it is important that business owners follow all formalities after setting up an LLC. A business owner should set up a business bank account and credit card separate from his or her personal finances, according to Ms. Lieberman. Funds that go into the business should go into the business bank account and business expenses should be going out of the business bank account or through the business credit card. If a business card was accidentally used for a non-business-related purchase, make sure that the business is reimbursed for that amount.
If you are a business owner who is struggling with debt, it is important that you seek the guidance of an experienced business debt lawyer. Robert Jacovetti of Jacovetti Law P.C. is an experienced New York business debt lawyer. Mr. Jacovetti works to negotiate with lenders or creditors to reach an agreement on behalf of business owners to pay back less than the full amount, or receive extra time, to save business owners from bankruptcy or a failed business. For more information or to schedule a consultation, you can call (516) 217-4488 or schedule an appointment in our Mineola office.