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Regardless of the type of business you want to run, you’ll likely have some startup costs to get it off the ground. Unfortunately, access to business financing options is rather limited for new businesses, and you may not want to apply for a business credit card until you know your idea will pan out.
One option is to use one of your personal credit cards to fund your business in its early stages. Here’s what to know about whether that’s possible and what to consider before you do it.
Can I Use a Personal Credit Card for Business Expenses?
There’s nothing in a consumer credit card agreement that prohibits you from using your account for business expenses. In contrast, business credit card terms and conditions typically stipulate that you can only use the card for business purposes.
But just because you can use a personal credit card to start your business, it doesn’t necessarily mean that you should. While business and consumer credit cards both function the same in many ways, there are some significant differences. Depending on your situation and your goals, one may be better suited for your business than the other. Differences include:
Rewards. Many business and personal credit cards offer rewards in the form of cash back, points or miles. Depending on the card, you may get a flat rewards rate on all of your purchases or an accelerated rate in certain spending categories.
If you get a tiered rewards card, you’ll want the bonus rewards categories to align with your company’s expenses, and business credit cards tend to do that better with standard business expenses, such as advertising, shipping, office supplies, telecom and internet services and more.
That said, some businesses may have regular expenses that align better with a personal credit card’s rewards structure. So, shop around and compare options based on your company’s spending habits.
“Choosing the credit card with a rewards system in alignment with your business needs can really boost your business’s bottom line,” says Gena Jones, a business coach and attorney.
Benefits. Personal credit cards may offer perks that provide value when you travel or shop, but they don’t offer any business-specific benefits. In contrast, some business credit cards may offer discounts on certain business products and services, integration with accounting software, free employee cards and more.
Depending on the type of business you have, some of these ancillary benefits may be worth having.
For example, personal credit cards typically offer longer 0% annual percentage rate promotions than business credit cards. “This is a cash flow gift,” says Jones. But she notes that you’ll want to do your research to make sure the personal card’s offer is better and to avoid mixing business and personal expenses on the card.
Protection. One area where personal credit cards have an advantage over business credit cards is in consumer protection. The Credit Card Act of 2009 created a variety of regulations for credit card issuers, including restrictions on when and how card issuers can raise their interest rates.
Although some business credit card issuers have adjusted their policies to match what the Credit Card Act provides for personal credit cards, that’s not always the case.
Impact on your credit. Using a personal credit card for business or personal expenses will affect your personal credit score, and you can damage it if you miss a payment or regularly run a high balance. However, it cannot help you establish and build your business credit history.
On the flip side, most business credit cards require a personal credit check when you apply – you don’t even need a business credit score to get approved – but after that, the actual account generally won’t show up on your personal credit reports unless you’re delinquent on your payments.
Capital One and Discover are two exceptions to this rule, with both card issuers reporting some or all of their business credit card account history to both the commercial and consumer credit bureaus.
But if you want to ensure that your business spending doesn’t impact your personal credit score or if you want to start building your business credit history, a business credit card with most issuers will do the trick.
“Just like personal credit scores, a higher business credit score indicates better credit, which leads to more favorable financing terms,” says Kate Hao, founder of Happy Mango, a financial services firm for businesses, “such as higher credit limits and lower interest rates.”
What to Do if You Decide to Stick With a Personal Credit Card
While business credit cards do have an advantage over personal credit cards in most areas, you may consider sticking with a personal credit card until you feel ready to get a business version.
In the meantime, it’s crucial that you take steps to separate your business and personal finances as much as possible. This means that if you’re going to use a personal card, use that card only for business expenses. Mixing your personal and business expenses on the same account can have significant negative consequences:
- Tracking business expenses is harder. Accounting is crucial in running a business because it helps you determine how well you’re managing the company’s finances and allows you to make more accurate projections and plans. But if you’re mixing business and personal expenses, it can be difficult to know which is which, especially if you’re not updating your accounting regularly.
- Preparing your taxes is more difficult. Business expenses are tax-deductible, but if you slip in some personal expenses, you may run into trouble if you get audited by the IRS. Additionally, interest paid on business expenses is also tax-deductible, but the same is not true for personal expenses interest. If you’re carrying a balance from month to month and paying interest, calculating how much is attributable to your business purchases versus personal expenses can be extremely difficult.
- Your legal protections are weaker. If you set up your business as a corporation or limited liability company, you’re generally shielded from personal liability in the event that the company is sued. If you’re mixing business and personal expenses, though, it could cause you to lose that protection. Note, however, that corporate and LLC protections don’t apply to your business credit card because you typically need to sign a personal guarantee when you apply, meaning that you agree to use your personal assets to pay off the debt if your business can’t.
- Obtaining financing is harder. Applying for a business loan can be a painstaking process if you’ve mixed business and personal expenses, and it could delay your funding. “Lenders do not want to spend time combing through your personal financial accounts to find business-related items or vice versa,” says Hao. “You want to make it easy for the lenders to understand the financial picture of your business so that you can get your loan and get it quickly.”
While you’re at it, it’s also a good idea to open a separate business bank account so you’re not managing any of your business activity in the checking account that you use for everyday expenses.
How to Apply for a Business Credit Card
As with personal credit cards, there are business credit cards available for business owners across the credit spectrum, though there are fewer options if your personal credit score is considered poor or fair.
To improve your odds of getting a solid business credit card, you’ll want to have good credit or better, which typically means having a FICO score of 670 or higher.
Once you’re ready to apply for a business credit card, the application process is similar to that of a personal credit card. Because most business card issuers check your personal credit, you’ll still need to provide your Social Security number. But if you want to use the card to build your business credit history, you’ll also need to obtain an employer identification number and add that to the application. You can apply for an EIN on the IRS website for free.
Additionally, you may be asked to provide the following:
- Business name and address.
- Your name and address.
- Business and personal phone numbers (they may be the same).
- Type of business (you’ll be provided with categories from which you can choose).
- Annual business revenue and monthly expenses.
- Years in business.
- Information about each owner, including the person’s stake in the business.
After you submit the application, the card issuer will typically underwrite it and provide you with a response within seconds. You’ll then get the card within a week or two, after which you can start using it just as you would a personal card.