Debt Financing- Why Using A Personal Credit Card Is Bad For Business

Many of us (include yours truly) have used personal credit cards to finance the start up or growth of our business. It’s easy, fast, and available. The interest rates may be lower than business credit cards. And, you may have exhausted your business loans or lines of credit. But there are a few dangers in using your personal credit cards to finance your business, instead of using business credit cards or loans.

• You can’t deduct the interest. If you mix personal & business expenses on your credit card, you can’t deduct the interest because some of the debt is due to personal expenses. If you are carrying a fair amount of debt, this could add up to hundreds of dollars each month.
• You will miss deductions. If you are randomly using personal credit cards for business expenses, you will inevitably forget to enter all those receipts into your bookkeeping system. Which means that you will miss a tax deductions that you deserve to take.
• You will be on “the hook” for what is really the business’ debts. If your business needs debt financing, the business (and its assets) should be responsible for paying off that debt, not your personal assets. If you are using personal credit cards then you are obviously personally liable for the loan, even if something happens to the business (you shut it down, for example).
• You can’t accurately track the real expenses of the business. When you are analyzing the profits & loss statements of your business and creating your cash flow projections for upcoming months, you need accurate information about your historical expenses. If you have expenses “hiding” inside your personal credit card statements, you will not be able to analyze whether your business is actually making a good profit, or if your business has cash flow problems.

What can you do if you are using personal credit cards?

You may not be able to switch to using business debt immediately, either because your business can’t get its own credit cards or loans, or because you are not ready to form a separate entity. If so, consider using only one personal credit card for business expenses, and use it ONLY for business expenses. This practice will ease your tracking & bookkeeping, and may make it possible for you to take all the deductions you deserve.

The Wealth Spa(TM) Minute: Have you used personal credit cards for business expenses? Did you input them into your bookkeeping system? Pick just one of your personal cards to use for business (and only for business) expenses.