A business credit card is a powerful financial tool that all good entrepreneurs should have at their disposal. But as they say, with great power comes great responsibility.
When you’re running an eCommerce business, a business credit card helps you build business credit, allows you to finance a variety of important business-related purchases, and provides lucrative rewards, perks, and protections. It truly does it all.
That being said, it’s easy to lean too heavily on your business credit card, or otherwise misuse it in an attempt to wring all possible value out of it. Not understanding the relationship your business credit plays to the rest of your business also leads to errors that have a ripple effect on your bottom line.
Whether you’re exploring options for your first business credit card, looking for another card as your eCommerce venture scales, or a long-time business owner who hasn’t given your business credit much thought in awhile, here are seven mistakes entrepreneurs make with business credit cards.
1. Using their credit card to finance overly large purchases
It can be tempting, once you get a hold of your new business credit card, to finance everything with it. Cloud-based software subscriptions, shipping costs, inventory—you name it. If you get points back on every purchase, why not get a discount on every purchase you make?
This works, but only to a point. But financing hugely expensive purchases that will take a long time to pay down with your credit card doesn’t make sense—your credit card interest rate will likely be too high. Unless you have a 0% APR during your introductory period, or a plan to pay down your charges quickly, the extra costs will rack up.
If you want to purchase something on credit that you expect will take months, or even years, to pay off, consider finding an alternate source of small business financing, such as a line of credit, loan, or inventory or equipment financing.
2. Maxing out their credit cards
Whether it’s personal credit cards or business credit cards, using as much of your credit available to you as possible is never a good idea.
One of the main perks of having a business credit card is its flexibility. Hit with an unexpected charge, or want to surprise your team with a party for meeting an end-of-the-month goal? If you’ve already maxed out your cards, you lose out on your ability to spring for sudden purchases.
Additionally, maxing out your cards throws your credit utilization ratio out of whack. This ratio is simple: How much credit is available to you, and how much of it are you using? Lenders look at this ratio when you apply for a loan to get an idea of how much outstanding debt you have. If you already appear overextended, creditors are less likely to offer you additional funding.
Keep your credit utilization ratio below 30% and you’ll appear much more responsible to future lenders—as well as have plenty of wiggle room to take on unexpected expenses.
3. Carrying a balance from month-to-month
Carrying your balance over from month-to-month is another mistake business owners make when they put too much stock in rewards points over their ability to repay their debt.
The bottom line is that reward points and perks will never be worth having to make interest payments on your purchases. Your exact APR will vary depending on your credit history and situation, but even the best cards have APRs north of 13%, and it will likely be higher.
When possible, only put on your card what you can afford to pay back at the end of the month. This habit will help build your business credit score and keep your money where it belongs—in your business bank account.
4. Mixing business and personal expenses
If you use a business credit card for only one reason, it’s this: To separate your business and personal expenses. Everything else is window-dressing—albeit quite attractive window-dressing.
So if you’re ever in a situation where you want to cover a personal expense with your business card, or vice versa, due to convenience or forgetfulness or wanting to take advantage of reward points—don’t.
Mixing your expenses is also called “piercing the corporate veil,” and doing so may expose your personal assets in the event that your business goes bankrupt or you’re the subject of a lawsuit. Even a seemingly harmless one-off purchase can have repercussions.
Plus, come tax season, you’ll be so much happier that you don’t have to parse through all of your personal credit statements for the odd business expense to write off.
5. Offering corporate credit cards to employees without setting boundaries
You may get to a point in your small business where it’s easier to extend individual corporate credit cards—physical or virtual—to your team members, rather than forcing them to contact you for the approval of every purchase. This is a good thing: It means your business is growing and you have faith in your team.
That being said, your employees may not be privy to all of your cash flow needs, and may not understand how easy it is to hamstring a small business with uncapped spending. Worse, their unchecked spending may affect your business credit, hampering your borrowing capabilities for years to come.
Before issuing credit cards, discuss with employees exactly what qualifies as a business expense, and let them know that you’ll have clear oversight into their spending.
6. Overlooking credit cards with annual fees
There’s a tendency for small business owners to want to cut costs any way they can. Often, this frugal mindset serves the well, and innovative techniques are borne out of the necessity to stay under budget.
Sometimes, however, small businesses need to invest. And while there are plenty of excellent no-fee credit cards out there, some business credit cards have an annual fee that are worth it—depending on how you plan to use it.
Research annual fee business credit cards and see what you get for your money. If you spending habits align with the perks offered on the card—point multipliers on travel, for example—you may actually come out ahead each year quite easily.
Bottom line: Don’t instantly write off a credit card just because it’s not free.
7. Closing rarely used accounts
As you continue to open up lines of credit and credit cards throughout the life of your business, you might think it’s time to close up your old accounts so you have an easier time reviewing your finances.
But closing your accounts affects your credit utilization ratio. If there are no clear benefits to closing those accounts other than streamlining things, it’s better to just leave them open and give your business even more credit overhead.
If your accounts are charging you money—e.g., with an annual fee—and you need to close them, time your decision strategically. About to apply for a loan from a bank or online lender? Hold off until after the deal is done.
Many of the best practices for personal and business credit cards are typically the same: Don’t be late with your payments, don’t spend more than you can afford. The difference with some of the above mistakes that they can truly prevent your business from taking important steps in its growth process.
Don’t limit your business to unaffordable lending options, or waste your time parsing through mountains of expenses. Make your life simple by avoiding these mistakes, and everyone involved in making your eCommerce business a success will be happier for it.