It’s always interesting how certain things take you by surprise when you start running a business. Sometimes, it’s the simplest of things that make you stand back and take a moment. For example, many business owners are taken aback by the concept of paying for things. As an individual, you don’t really think twice about making purchases. You simply use your credit or debit card depending on what you’re buying.
However, as a business owner, you need to know the best way – or ways – to pay for things.
What should you do?
Don’t make payments using your personal accounts
Fundamentally, the number one rule to follow is to separate your business accounts from your personal accounts.
Never pay for business-related things with a personal bank account or credit card.
Why? Because it ties your personal finances to your business finances. As such, you become personally responsible from a financial side of things. If your company falls into debt and you owe money to suppliers and other people, your personal finances are now at risk. Legally, these debtors can try to claim money from you or get you to sell personal assets to repay them.
If you have a separate account for your business, you won’t have this issue. Especially if you register yourself as a proper limited company. Effectively, you separate your personal finances from your business finances, making everything less risky.
Also, it’s simply easier to keep the two apart from a bookkeeping perspective. How difficult is it to manage your income and outgoings when you also have to trawl through personal transactions? I’ll give you a clue, it’s very VERY challenging. Instead, a business account gives you access to all the transactions relating to your company. Thus, it’s much easier to see where the money is going, when it’s coming in, and so on.
The main options for making business payments
Okay, we’ve established that you need some separate business accounts. With that in mind, here are the main options you have when making business payments:
If you create a business bank account, you will get a business debit card to make transactions with. These cards work the same as normal debit cards in that they take money from your bank account to make payments. It’s a good idea to use these cards to make a lot of your general payments if you’re out and about or paying for software subscriptions, etc.
It’s also worth noting that your checking account can be used to make other payments too. For instance, if you have employees, you can set up a payroll system that uses your business checking account to pay everyone each month. This will also be the account where all of the money you earn ends up.
Alternatively, you can get business credit cards. Again, they work as a normal credit card would. The difference between business credit cards and normal ones is that you typically have a higher credit allowance on these cards. Additionally, they can provide you with more rewards as your business will be making larger and more frequent transactions. Some of these cards can give you as much as 5% cashback on purchases. Let’s say you spend $5,000 on your business credit card, you could end up with $250 cash – which can add up when you consider how many purchases you make during a year.
When is the best time to use a credit card? Well, you can use it to pay for just about any expenses you have. I would say paying for larger things is probably better to do on a credit card as you get the credit guarantee that protects your purchase. It also makes it easier to manage your cash flow as you don’t depart with a huge chunk of money right away. In the above example, you make a $5,000 purchase on your credit card for new business equipment, and then over the course of the month you slowly pay off your credit card bill in installments. You don’t have to do this – you could wait until the bill is due and pay it all in full anyway, whatever works best for you at the time.
Plus, you also have the benefit of building a business credit score. Did you know that your personal credit rating doesn’t really hold much influence if you’re looking for business loans? You need to have a good business credit rating too, and using a credit card responsibly is the easiest way to improve this.
Prepaid business cards
Another possibility is to use prepaid business cards for regular daily purchases. These cards are seen as an alternative to either credit or debit cards as they almost tread the line between the two. A card like this comes pre-loaded with money that you can use to make purchases or withdraw money from an ATM.
However, it differs from a credit card in that you don’t have a credit limit and can only spend what is on the card. So, it’s a brilliant idea if you’re trying to operate on a tight budget and don’t want to overspend. These cards are also handy if you have a lot of employees that need to make purchases all the time. It’s unwise to hand out multiple business credit or debit cards to employees, but a prepaid card is far easier to manage as you remain in control of what’s on every card.
There are also prepaid business cards for specific industries that work basically the same. Fleet cards are a fine example, created for any company that has a fleet of vehicles and drivers. One of the main benefits of using a fleet card is that you can manage each employee’s spending habits while making it easier for them to buy fuel, pay for repairs, etc. Depending on what industry you operate in you could find other prepaid cards that are similar.
Aside from the three options above, you could pay for things in cash or via a check. However, these are no longer that popular because hardly anyone accepts checks nowadays. A lot of places and suppliers may accept cash payments – and they could prefer them for tax reasons – but the problem is they’re harder for you to track. This is why cards are the best because it’s easier for you to track every single payment, avoiding issues come tax season.
To summarize, the best way to pay for things as a business owner is to set up separate accounts for business purchases. This stops instances when your personal finances become embroiled and wound up in your business ones. If this happens, it could make you legally liable to pay off business debts with your own money. Likewise, it’s so challenging to manage your books and keep track of every payment when you have personal purchases in the mix as well.
As shown above, you have a range of payment cards and ways to make purchases as a business. It’s always good to have a credit card as this helps you build your business credit rating. That’s important as it can help you get better funding options in the future. Business loans come with better rates and allowances when lenders know you have a powerful credit rating.
At the same time, there’s nothing wrong with using debit cards or prepaid cards too. The most important thing to remember is that you should avoid paying for business-related things with your own money. It will simply cause too much confusion and may lead to further problems later down the line.