Paying for business expenses with your personal credit card or a business loan

Benefits of using a personal credit card

You may have used a personal credit card to pay your expenses when you started your business, which has some definite advantages.

It may have been the only source of credit available to you at the time. It’s also relatively easy and quick to get a personal credit card. In addition, you won’t owe any interest if you pay the full balance on time. You can even accumulate rewards points with certain cards.

Drawbacks of using a personal credit card

Using your personal credit card is no longer advantageous as your business grows. “There are some risks with using your personal credit card for your business. You could be jeopardizing your personal credit and your personal buying power,” says Christensen.

She points out several disadvantages to using a personal credit card to finance business activities.

1. Paying high interest rates

Credit cards generally have high annual interest rates on balances carried over from one month to another. Those interest charges can become a serious problem if your credit card balance continues to grow.

2. Jeopardizing your personal credit

Your personal credit score is assessed based on several factors, such as:

• The number of requested credit checks
• Your payment history
• The percentage of available credit remaining

“When using your personal credit card for business purposes, you’re increasing the utilization of your overall credit and that can negatively impact your credit score. That can put your personal credit at risk, especially if the business runs into hard times, and you make some late payments,” explains Christensen.

3. Reducing your personal purchasing power

If you use a large portion of your personal credit to pay your business expenses, you’ll have less credit available to meet your personal needs.

In addition, your credit score can impact your ability to get other personal loans, such as a mortgage or a car loan. If using your credit card for your business expenses has negative repercussions on your credit score, it could reduce your personal purchasing power.

A business loan: A good solution for your business

Business loans offer several advantages for businesses. Here are a few:

1. Meeting your business’s specific needs

Business loans are designed to meet the needs of a growing business.

For example, a business loan offers the following options:

• Deferring principal payments on the loan until the amount borrowed yields profits
• Negotiating a seasonal repayment schedule that accommodates your cash flow peaks and dips during the year
• Qualifying for principal repayment holidays during periods of strong growth or difficulty

Every business is unique, and the terms and conditions of a loan can be customized to meet your company’s needs.

2. Protecting your cash flow

A term loan can help you spread out your repayments over the course of the useful life of an asset or a project that you’re starting. You can coordinate the term of your loan with the period in which you will use the funds, allowing you to stagger your payments and protect your cash flow.

“For example, let’s say you’re expanding into a new market,” Christensen says. “You need financing for sales and marketing expenses and to hire additional staff. The benefit from this growth could be over four to five years. Taking out a term loan will help you match the repayment to the period you’re getting a benefit from the investment.”

3. Keeping your personal and business finances separate

You should try to keep your personal finances separate from your business finances. This makes it easier to keep track of your accounting and prepare tax returns, but above all, it will helps you protect your personal credit. A business loan allows you to keep your finances separate and will make it easier to build a credit history for your business with a lender.

“A bank is going to get to know you and see you are good for your repayment. So that’s important for a growing business to really consider,” Christensen says.

The drawbacks of a business loan

While business loans offer a host of advantages, they aren’t necessarily right for every situation. Here are a few obstacles that you could encounter when applying for a business loan:

• Some financial institutions may decline your application if your business isn’t incorporated.
• Approval turnaround times can be long.
• It may be more difficult to get a loan if your business is just starting up.

Weighing the pros and cons of personal and business loans will help you make a more informed choice.  

Next step

Learn how to prepare a successful financing application by downloading our free guide for business owners: How to Get a Business Loan.