Invoice factoring is a tool for managing business cash flow by leveraging unpaid invoices for more immediate financing. We think it is a fantastic tool and an alternative to business credit cards – at least for some types of business expenses. There are just some things that really should not go on a credit card.
Below are four business expenses experts generally agree should never be charged to a credit card. If you have already done so with some of them, do your best to pay off the balances quickly. Should similar needs pop up again in the future, consider invoice factoring as a better alternative.
At the top of the list is payroll. It is the biggest operating expense of nearly every business. If you are having trouble making payroll, you need to consider that there could be something wrong with your business plan or execution. Charging payroll to a credit card only makes it easier for you to put off trying to figure out why you’re not making enough money to pay employees.
The other downside here is paying interest on payroll. By using your credit card, you end up paying more for the same amount of labor. It just doesn’t make sense to pay interest on employee wages.
2. Personal Expenses
It can be tempting to use a business credit card to cover personal expenses, especially if you operate as a sole proprietor. There are two particularly good reasons to not do so. First is the fact that you lose many of the protections that personal credit cards offer. Business credit cards generally don’t offer those protections.
Second is dealing with the tax man. Though charging personal expenses to a business card is not illegal, it does demonstrate to tax authorities that you are mixing funds. If you were ever to be audited, you might have a harder time satisfying questions about business and personal expenses.
3. Cash Advances
Some small business owners use their company credit cards to take cash advances. This is one particular practice that invoice factoring can completely replace. Invoice factoring gives business owners access to cash at a more reasonable rate than credit card cash advances. Cash advances on credit cards are generally subject to even higher interest rates that could be up to 20% or more.
4. Big-Ticket Items
Big-ticket items can be awfully tempting to business owners with high credit card limits. But the high interest rates associated with business cards made them the wrong choice for high ticket items. If your business needs to invest in something expensive, which could be more than a few thousand dollars, you are better off with invoice factoring or another means of raising cash at a more reasonable rate.
Business credit cards play a key role in funding company operations. But they have their drawbacks, including high interest rates. We urge business owners to be incredibly careful about how they use their credit cards. In some cases, it makes more sense to employ invoice factoring. Leverage your invoices for cash at a more reasonable rate than business credit cards.