The Pros and Cons of Using a Business Credit Card for Personal Expenses

For the typical corporate employee, there tends to be a pretty strict delineation between work and personal life. The work wardrobe. The daily commute. The march into the office. Separate email addresses. Often even a separate work-related mobile device.

Work is work, and personal is personal.

Among entrepreneurs, on the other hand, the line between work and home can be a little less clear. It’s no wonder, then, that a large number of small business owners struggle to maintain a clear separation between their work and personal finances—particularly when it comes to charging personal expenses on a business credit card.

After all, there’s no boss signing off on your monthly expense report. And although the fear of a tax audit should be more widely recognized by entrepreneurs, many don’t think twice about this possibility.

Beyond the simple convenience of using the first card that emerges from your wallet, is there any advantage to using a business credit card for personal expenses? Does the card you use really matter at all?

The pros of using a business credit card for personal expenses? They’re few and far between.

If you do enough of a search-engine deep dive, you’ll come across at least a few articles advocating perks of using a business credit card for personal spending. These advocates point to better rewards opportunities, higher credit limits, and tempting 0% APR introductory offers as reasons to make the most of being a business owner by choosing a business rather than consumer credit card for personal use.

That said, the credit card companies themselves have consistently countered that argument, going as far as to email their business credit card customers with reminders that the cards are not intended for personal use. The most widely cited disadvantage of this practice is the fact that business credit cards are not protected by the Credit Card Act of 2009, which put in place strict controls on credit card terms and conditions designed to protect consumers.

Overall, it’s doubtful that any amount of extra hotel points or airline miles will be worth racking up a high credit limit on a non-consumer protected card that is almost guaranteed to jump up to an exorbitant interest rate as soon as that introductory period ends.

The Cardinal Rule: Keep Personal and Business Expenses Separate

On the whole, we don’t recommend using a business credit card for personal expenses. But even if you choose to do so, what’s most important is that you’re not using the same credit card for both business and personal spending.

Trying to splice through what’s business and what’s personal within the same credit card statement month after month will be stressful and time-consuming—and it’s an easy recipe for mistakes in your business bookkeeping. But beyond these logistical reasons, intermixing your business and personal finances can also create many other hardships for your business’s long-term financial potential.

Here are three potential downsides to keep in mind when considering using a business credit card for personal expenses—particularly when that may involve combining business and personal spending within the same account:

1. Separating expenses matters for tax liability.

When the time comes to file quarterly and end-of-year taxes for your business, any capable accountant can advise you on a multitude of potential savings in the form of deductible expenses. Many argue that the tax code isn’t entirely clear in this area, and many entrepreneurs misunderstand this lack of clarity as all the more reason to intermix personal and business expenses.

But if you’ve used a business credit card for personal expenses so often that it’s hard to tell what should go where, your accountant will spend far more time trying to organize your taxes than seeking out potential savings. And if you do make the mistake of drastically overstating your deductions, you could put your business at risk for an IRS audit, which will cost far more in time and operational distraction than you can possibly save.

2. Overlapping personal and business expenses impacts your credit.

As a small business owner, you hold the responsibility of building up and maintaining a positive credit rating both in your personal life and for your business. Your personal credit rating impacts every aspect of your financial life, while your business’s credit rating is a further demonstration of your ability to manage financial commitments in a business setting.

For credit reporting agencies, using a business credit card for personal expenses has at best the potential of confusing reporting to your business vs. personal credit reports—and in the worst case, it can be a red flag to the reporting agencies about your trustworthiness as a borrower.

3. Mixing personal and business finances hurts your ability to get a business loan.

In the long run, your business and personal credit card spending impacts far more than just the line items and numbers on your credit reports. If at any point you decide to expand your business through financing from a business loan, you will experience firsthand the true impact of mixing business and personal expenses and how this affects your credit.

As they determine whether and at what interest rate to fund your business loan, lenders will evaluate your personal and business credit reports plus your previous year’s bank statements, balance sheets, profit and loss statements, cash flow statements, and even tax returns.

Each one of these documents has the potential to be negatively impacted by mixing personal and business finances, causing discrepancies or evidence of poor expense management that may lead a lender to deny your application.

Tips for Separating Business and Personal Finances

To protect yourself from starting down the path toward a mass of interwoven business and personal expenses, follow these five tips to make sure that line in the sand remains clear.

1. Write a list of what qualifies as a business expense.

When we’re in the moment, it’s all too easy for the desire to get what we want right now to cloud our judgment about what qualifies as a personal or business expense. Whether that’s a shiny new computer accessory or an extra round of drinks with a friend, our brains trick us into saying, “It’s for the business!” Or worse: “It’s a tax write-off!”

And before you know it, all those little impulsive expenses add up into a mountain of costs that can sink your business.

To avoid impulse decision-making, write out a list in advance of what does and does not count as a business expense—particularly when you’re in a social setting. For example, all dinners while you’re at a conference probably count as business expenses. That dinner last week with your old high school classmate, however? Likely not. After all, a polite, “How’s business going?” doesn’t quite count as a prospect inquiry.

2. Set a detailed budget for business expenses.

Even if you’re careful to keep personal and business expenses separate—without a proper plan for your spending, costs that qualify as legitimate business expenses can still add up faster than you may expect. Your goal as a business owner should be to not only keep your business and personal expenses separate but also to practice smart cash flow management in both areas.

Writing out a detailed budget for your business expenses is an important step toward making sure you keep your cash flow management under control.

Be sure to include not only regularly recurring expenses like your lease payment, payroll for employees, inventory purchases, and taxes, but also the irregular, day-to-day business expenses that arise, such as travel costs, office supplies and equipment, and meals out with clients or vendor contacts. These seemingly small operational expenses are often the ones that can most quickly add up to cripple your cash flow and undermine your business success.

3. Keep your business credit card in a separate location.

Whether you’re out to a late night dinner or in the checkout line with a fussy child, it is all too easy in those distracted moments to simply grab the wrong credit card from your wallet, creating yet another mix-up as a result of using a business credit card for personal expenses.

To avoid this, consider keeping your business credit card in a separate pocket of your wallet or purse—or even leaving it stored away in your office desk unless you’re attending a business-related event. However you go about it, the goal here is to safeguard against the common mix-ups in credit card usage that happen when you’re out and about.

4. Make sure your business credit card stands out from the crowd.

Along those same lines, it’s a good idea to make sure that your business credit cards stand out visually from personal credit cards that you regularly carry.

Imagine squinting in a darkened restaurant, listening attentively to a friend’s riveting story as you covertly try to remember which credit card is the right shade of navy blue—or worse, try to make out the etchings of your business name in the restaurant’s dim lighting. You’re bound to make a mistake!

Yet if you ask, many credit card companies will be happy to offer you a selection of card faces so that you can instantly identify what’s what in your wallet.

5. Separate transactions when shopping for business and personal needs.

For home-based business owners in particular, trips to the local big box store can be the most tempting beginning of that slippery slope toward combining personal and business expenses onto the same credit card.

It starts innocently enough. The first time around, you need both laundry detergent and copy paper. “Does it really matter if I pay for that $6 laundry detergent on my business credit card?” you ask yourself. But the next time, you might need a new computer monitor and a hundred dollars worth of groceries—and bad habits can be hard to break.

It’s hard enough to splice between separate personal and business transactions charged to the same credit card. When it’s on the same transaction, you’re looking at hours spent with a calculator and a highlighter going line by line through receipts in order to get everything straight.

Is that really worth the extra 30 seconds saved in the checkout line?

Do yourself a favor and politely ask the cashier to separate your purchases into two separate transactions so you can use the right credit card for each.

What to Do If You’ve Charged Personal Expenses on a Business Credit Card

Imagine that you’re in line at the crowded grocery store. The cashier has scanned every item in your cart, and all that’s left to do is pay for your order. You reach for your wallet, only to discover that the only card available is your business credit card.

The reality is that even if you have no intention of using a business credit card for personal expenses, these circumstances do come up from time to time. That’s why you should always have a plan in place for how you’ll deal for expense reimbursements within your business—even if you’re running a business of one.

If you’re not sure where to start, here are three smart principles to follow any time you find yourself having intermingled business and personal spending:

1. Keep your receipts.

First and most obviously, be sure to hang onto receipts for any purchases that blur the line between personal and business expenses. If you can, keep these in a zippered section of your wallet or a place where they won’t be lost.

2. Send yourself an email.

While holding onto your receipts will be helpful in this instance, it’s not necessarily a failsafe. To make sure you have a searchable record of the expense for later, the answer is simple. Grab your smartphone, take a picture of the receipt, and send yourself an email that includes the date, store name, and something like “personal expense for reimbursement.” This way, when the time comes to process your business expenses, you’ll have an easy way to search for and reconcile the personal expense.

3. Add a journal entry to your accounting software.

Most bookkeepers recommend processing expenses for your business somewhere between once per week and once a month, depending on how many individual transactions you typically incur. This is the time when you’ll want to identify personal expenses, issue a reimbursement transfer between your personal and business accounts as needed, and use the journal entries function of your accounting software to denote the expense issue and match it with the reimbursement transaction.

The exact process for this can vary depending on your accounting program, so it’s best to consult your software’s tutorials section, customer service department, or your bookkeeper for exact guidance.

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As you can see, the process for clarifying the blurred lines between what’s business and what’s personal with regard to your credit card expenses can quickly become a minefield for frustration and lost time, leading all too many business owners to ignore the problem (and the accounting inaccuracies that go with it). This is a slippery slope that, in the long term, can wreak havoc on your taxes, your credit, and the fundability of your business.

While certain rewards and conveniences can make using a business credit card for personal expenses seem like a tempting prospect, the truth is that in the long run, this is a move that is rarely worth its added complications.

Bottom line? Just avoid it.

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