One of the first things we advocate entrepreneurs to do when they legally incorporate their business entity, is to open a business banking account.
This is because your business banking account is a precursor for all the other milestones to come – injecting your first dollar, receiving payment from your first customer, paying your first employee, raising your first round of capital from investors, and more.
And with your business banking account comes the option to apply for and use a corporate credit card. We discuss the pros and cons of doing so, compared to using a personal credit card for business-related expenses.
#1 Liability And Responsibility
We start with the most significant implication of choosing a corporate card versus a personal credit card for business expenses, which would be liability.
Setting up a corporate credit card is a pretty involved process – as with other financial instruments that grant access to company financial resources, such as company cheques and bank accounts. Part of the process would be to ensure all the relevant officers sign off on the persons authorised to use the corporate credit card and set the appropriate credit limits.
This is crucial because liability and responsibility for paying off any charges on the corporate card ultimately lie with the company. So long as there is no legal wrongdoing, such as fraud or misappropriation of funds, employees are shielded from personal liability for authorised business expenses.
For example, an employee might have made non-refundable deposits for a company trip that was cancelled at the last minute or made in error due to some miscommunication, and the company would be (rightfully) held responsible for settling the bill.
A side-effect of this liability and sensitivity would be that the company owners and directors would likely only want to give corporate credit cards to a small number of trusted individuals, and it might not be practical to extend this access to all employees.
On the flip side, asking employees to use their personal credit cards transfers the legal liability to them to settle payments. This means employees may be left to make timely repayments in the event that the company shuts down or delays repayment for any reason.
#2 Making Reimbursements
As mentioned in the previous section, the responsibility for settling bills for the corporate card lies with the company, which is either you, the entrepreneur, or the person(s) that handles your company’s finance matters.
From the workflow point of view, this is preferred and much more convenient, since the financial controller would also have sight of all the business spending in one convenient place.
On the other hand, having to spend using one’s personal credit card would entail proper documentation of one’s business expenses, and then submitting those claims properly at the end of each month, while being careful to ensure personal expenses don’t accidentally get submitted. Someone would then need to review those transactions before making reimbursements.
From an employee point of view, they not only need to do more work in order to get paid (back), but they also risk making the mistake of not claiming correctly, and then making a loss for work-related expenses.
For employees who need to do this, one simple tip would be to dedicate just one credit card for all work-related expenses, and submit the entire statement from that card for claims each month.
#3 Cashflow And Spending Limits
Depending on the speed of processing claims, employees might need to settle their personal credit card bill (with company expenses) first, before subsequently getting reimbursed by their company. For those with tight financial commitments, this might become a burden.
Furthermore, if there are big-ticket expenses that need to be paid for work purposes, such as air tickets and hotels, the employee would have a greatly-reduced spending limit for the rest of the month.
For those with big-ticket items of their own to pay for, such as renovations, course fees, weddings, or annual insurance premiums, the sudden reduction in spending limit might lead to real inconvenience.
#4 Perks And Fairness
Obviously, perks for personal credit cards typically overshadow anything corporate cards allow you to earn. This might be an ancillary perk for whoever makes purchases on behalf of the company, just as frequent fliers often get to chalk up air miles on the company’s dime.
As nice as this might be, business owners need to consider if this might constitute a “non-clean wage”, where tangible, but un-stated financial benefits are enjoyed by some employees, such as significant rewards points, air miles, or cashback for hitting high spending tiers.
Other employees may also think it is an unfair perk they do not get to enjoy, and hence become unhappy employees.
Corporate credit cards typically offer business benefits, such as making your accounts easier to manage, better tracking of expenses and putting the liability of the expenses on the company. This may include integration with existing accounting software such as Xero.
Work Out A Balance Between Convenience And Benefits
There really isn’t a one-size-fits-all definition for what business owners should do. Depending on the size of your company, company policies you put in place and spending needs of your business, you’ll have different thresholds on areas like security, convenience, perks, and cashflow.
We hope that this discussion on the various implications of credit card types would be instructive in helping you formulate a policy that works best for your company.
This article was first published on 24 September 2020 and has been updated with the latest information.
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