Credit cards can be an essential of funding for a company – especially a smaller one – providing necessary cash flow to help maintain and build your business. In addition to a revolving line of credit that can be used to make purchases and cash withdrawals, many business credit cards offer record-keeping tools to help track, categorize and manage expenses, and rewards programs – including cash back incentives, airline miles and discounts – to help stretch your dollars.
Like consumer credit cards, however, business cards make it easy to rack up big balances (and the corresponding interest charges and fees). Without a good system in place, it can be difficult to keep track of – and keep a handle on – credit card spending, which ultimately affects your bottom line. Here, we take a look at strategies to keep spending under control and help you use your business credit card effectively.
1. Set Up an Accountability System
"The most important step a small business can take to make sure credit cards are used effectively is to set up a bomb-proof accountability system," says John Burton, CEO of Moonshadow Learning Services, a leadership development company near Asheville, N.C. "This could mean everything from pre-approval of all credit card spending, to rigorous requiring of receipts, to pulling credit cards from those who do not report completely and on time with receipts," says Burton.
To maintain control over credit card spending, it's vital to create a comprehensive accountability system, including how spending is approved, reported and recorded. Have it in place before the first credit card arrives and, Burton says, be consistent, rigorous and fair, and tolerate no exceptions. "If there is a policy of requiring all accounting and receipts to be turned in by the 10th of the following month, say, or whatever day, have a 'no exceptions' policy," he emphasizes. "This raises everyone's awareness about how seriously the company takes stewardship of its funds. Giving someone a credit card with a $5,000 spending limit is like handing them a blank check."
2. Decide Who Gets a Card
Burton acknowledges the challenges employers may face in deciding who gets a credit card. "I've seen businesses that lost control of credit card spending by issuing too many cards to too many people, and thinking that all important officers and travelers needed the convenience of a company credit card," says Burton. While giving everyone a credit card might seem like the right or easy thing to do, it can lead to a "dysfunctional, expensive system, and a serious lack of control and accountability," he explains.
Use alternatives and establish rules. "Many companies, especially with sales people, reimburse for company spending on personal credit cards with excellent accountability – i.e., no receipt, no reimbursement," says Burton. It is helpful, however, to have clear rules regarding who gets a card, whether it's based on seniority, position or some other factor(s). This can help avoid confusion and mitigate bad feelings from employees who would like a card, but are not eligible.
3. Set Limits
Every business should have clear policies about spending, including which expenses can be put on cards, how much employees can spend and how often they can use their cards. It's important to put the policy in writing, and have every employee who is issued a card read and sign it. After they do, give each cardholder a copy to use for reference.
"Potential credit card users should know the rules on pre-approval of spending and when it's okay to use a company card," Burton says. If your business doesn't have a clearly stated policy in place, it can become easy for credit card users to justify any expense, even those you didn't intend to cover. "You have to specify if it's O.K. to spend on alcohol at a meal, if there's a limit on meals, the dollar limit above which non-routine approval must be obtained, and if a staff person gets meals paid for on non-overnight travel," says Burton.
Depending on the business card, you may be able to set up restrictions that limit transactions to a certain dollar amount, spending category, and even certain days and times. With some cards, you can set up individual restrictions for each employee. For example, you may limit one employee to $50 a day any day of the week for gas purchases, while limiting another to $100 for gas and $50 for meals each day, but only on business days.
4. Be Watchful
Many business credit cards allow you to set up activity alerts that arrive as text or email messages. The alerts can be set up to notify you each time a transaction takes place, or only if an employee uses (or tries to use) a card in an unapproved manner. You can also take advantage of online and/or mobile banking to view up-to-the-minute account activity. It goes without saying that you (or your accounting department) should review each statement to make sure each line item is a charge you authorized.
5. Use Credit Wisely
While credit cards are easy to use, they're not always the best choice, especially for large purchases that can't be paid off in full before interest kicks in. "If a business uses a credit card to make a big capital purchase and therefore doesn't intend to pay it off immediately, it's important to consider the interest cost tradeoff with another kind of financing," Burton says. The interest rate on credit cards is typically much higher than for small business loans, so even though it takes extra effort to secure a loan from a bank or other lending institution, it often makes financial sense to do so.
It's also possible that a large purchase – or a couple of large expenditures – can max out your credit card and leave you without a line of credit. "This kind of spending can impact spending limits and availability of credit if overused," Burton says.
The Bottom Line
Business credit cards provide access to a revolving line of credit with a set credit limit so your company can make purchases, withdraw cash and benefit from any rewards the card offers. Credit cards eliminate (or at least reduce) the need to write checks and reimburse employees. They also provide expense documentation through monthly statements and other accounting tools. In addition, business credit cards offer convenience, and employers can set up systems and policies to make sure spending is kept under control and that cards are used cost-effectively.
"Good policies and habits must be established from the start. It's not designed to be penal, just good practice," says Burton. For more information, read The Pros And Cons Of Small Business Credit Cards.
