Can you use a business credit card for personal expenses?

While enjoying a business dinner with a client and charging the expense on your business credit card is reasonable, using the same card to make personal purchases, like buying a trendy jacket on sale, is a breach of the card's terms and conditions. 

Even though occasional personal expenses might go unnoticed by the card provider, it’s crucial to understand that most credit card providers forbid using business credit cards for personal purposes. Although it might not be illegal, it is incorrect and can lead to several consequences, including:

1. Account cancellation

Many credit card issuers expressly prohibit the use of business credit cards for personal expenses. While occasional small personal expenses might slip under the radar, frequent non-business spending on the card could be seen as a violation of the contract terms. In such cases, the card issuer may decide to cancel your credit card account for violating agreed terms of usage. 

2. Impact on business funding

If you require business finance at some point in the future, a lender could ask for your credit card statements, and personal expenses on your business card could affect the chances of approval.

Lenders and investors require transparent financial records to evaluate a business's financial health and creditworthiness. Mixing personal expenses with business expenses could raise concerns and potentially limit the funding opportunities available to your business.

3. It could get challenging to keep track of your business expenses 

Regularly using your business credit card for personal expenses could make it challenging to properly track and manage your business-related expenses. This can also create complications during tax time when it comes to documentation. 

Business owners need to provide accurate records of business expenses to claim deductions. Having personal and business expenses on one card can complicate this process, as it can become challenging to distinguish between the two and personal expenses are generally not eligible for tax deductions. By using separate cards for business and personal expenses, you can maintain clear and accurate records for business costs, which could simplify accounting for your business to a great extent. 

4. Loss of consumer protections

Similar to personal credit cards, certain business credit cards come with extra perks such as complimentary insurance, consumer protection, extended warranties on purchases, and the opportunity to earn rewards or points for various benefits like travel or gifts. However, it's crucial to note that these rewards and protections are applicable only to eligible business expenses, not personal purchases. 

If you use your business credit card for non-business spending, the card issuer may identify it as unusual activity and may not extend the benefit of the consumer protections you typically get with the card to your personal purchases.

Business expenses can be understood as costs incurred in the ordinary course of business, like purchasing laptops to enable your staff to work remotely. On the other hand, personal expenses, such as buying a PlayStation for your home, are unrelated to your business operations.

Maintaining clear boundaries between business and personal expenses is vital for several reasons. Firstly, intermingling these expenses could deprive your business of essential funds, impacting its financial stability. At worst, it may result in legal complications, which could negatively affect your business's integrity and credibility.

To ensure you don’t use your business credit card for personal expenses, it is important to have a clear distinction between personal and business expenses. If you’re wondering what qualifies as a business expense, check if it is all of these:

• Reasonable
• Ordinary
• Necessary

…for running your business.

While it isn’t always easy to put a finger on what is a reasonable expense, it may be easier to look at some examples of unreasonable expenses:

• You hire a famous (and pricey) designer to design your company bathroom. While this isn’t exactly a personal expense, it may be considered excessive and thus unreasonable.
• You pick up a steak and a bottle of wine for yourself and charge it to the company card.
• You book a private yacht for yourself and your family on the company credit card.
• You put celebratory expenses for personal milestones, such as birthdays or anniversaries, on the company card.

Note: If you were to buy the wine to celebrate a good business year and share with your employees at the company annual dinner, it might qualify as a reasonable business expense. The general rule is ‘if in doubt, err on the side of caution’, or seek advice.

To understand whether an expense is ordinary or not depends on the nature of your business. You might be spending $1,000 on food every month for exotic tropical birds. If you run a pet store, then it’s fine; however, if you’re in the business of manufacturing copier cartridges then perhaps it’s not an ordinary expense.

Note, ordinary doesn’t mean usual. An expense that you might only pay once during the entire run of your business, such as getting rid of bats in the attic might still qualify as a business expense and chargeable to your business credit card. 

In general, as long as the expense is necessary for the proper functioning and continuity of your business, it may be charged to your business credit card as a legitimate business expense.

How do you decide if an expense is necessary or not? Much like a reasonable expense, there is no easy way to determine if an expense is necessary. But there are numerous examples of unnecessary expenses:

• Renting a shoe shiner for your employees, at a telemarketing firm
• Purchasing state-of-the-art gaming PCs at your car dealership

The litmus test is to know if an expense is ‘appropriate and helpful’ for your business. For instance, does the expense directly support your business goals, or is it vital for the smooth functioning of the company? Additionally, some expenses may not directly contribute to business growth but help it in other ways.

For instance, redesigning the lobby to create a more inviting environment for clients or investing in games to promote employee relaxation and productivity. Despite not being directly related to growth or operations, such expenses may be considered necessary and legitimate for the overall well-being and functioning of the business.

While it’s usually not hard to avoid the mistake of mixing business and personal expenses, occasional accidents could happen. For instance, you might unintentionally charge travel expenses for family members joining you on a business trip to your business card. While valid business expenses are acceptable, any spending related to your family is a personal expense unless it was necessary for business purposes. 

But what can you do in such a case if you unintentionally charge a personal expense to your business card. 

If you accidentally use your business card for a personal expense, there are steps you could take to rectify the situation. Firstly, if the expense is significant, consider informing your accountant and segregate the transaction from your business expenses in your bookkeeping records. This will help in maintaining accurate financial records and prevent any confusion during tax season. Secondly, try to promptly pay off the balance related to the personal expense to avoid affecting your business's available funds.

If the reason for using the business card for the personal expense was to earn rewards points or due to the higher credit limit, a better option might be to explore personal credit cards that better suit your lifestyle and spending patterns. This way, you might find it easier to keep your personal and business expenses separate and avoid any potential mix-ups in future.