Credit card liability explained for business owners

Your immune system, MMA fighters, and the military all share something in common with your business: the need for a rock solid defence.

In the case of a business, that defence means protection from the liability of losing company money, and indeed personal money, in the case of misuse of company funds on credit cards, plus fraud, criminal activity and exposure to personal guarantees.

Being personally liable just means that you the company owner, founder or top executive is on the hook for the monthly credit card bill.

A business credit card monthly bill will typically be much much bigger than that of a person. Think of it: office space, equipment, supplies, furniture, marketing, insurance, travel. If your small business has grown to be a medium-sized business, do you really want to be personally liable for all of that? Wouldn’t you rather shift the liability to the company now that it’s established?

When running your own business, things can fall by the wayside – particularly if you end up juggling a variety of tasks at once. But one thing that should never slip your mind is what you are liable for. This all-encompassing term throws up plenty of potential risks for startups bringing on their first employees,  as well as for established small and mid-sized companies.

What does liability mean?

So what does liability mean in simple terms, and how can you protect yourself – and your company – if an employee goes rogue financially? For business owners, liability can be separated into two parts:

• Liability for debts: This type of liability is any money owed for the purchase of assets, inventory or services. A long-term liability would be a mortgage for business premises or any loans payable, while a short-term liability may include payroll taxes that you should set funds aside for. Non-payment of debts could result in legal action.
• General liability: This includes any number of actions that also open the business, the owner or the employee up to legal action, such as injuries or losses caused to third parties.

While businesses can usually insure against general liability, it's the liability for debts that can really throw a spanner in the works. This is especially the case if you fail to set clear boundaries with employees when it comes to how they pay for business-related expenses, which is where you need a clear company policy on credit card use.

Who is liable for unauthorised fraudulent spending?

Your business credit card is protected from hackers, skimmers, phishing emails, scammers and brazen mailbox raiders. Your company’s liability for “unauthorised’ fraudulent spending is zero, provided that you used reasonable care in protecting your card from loss or theft, and you promptly report loss or theft to your financial institution.

• Mastercard Zero Liability Policy
• Visa Zero Liability Policy
• American Express Card Fraud Protection Policy

Consider these four liability scenarios:

1. Misuse of funds: Employees taking business funds for personal use. This is particularly risky if the owner has business and personal funds in the same account in their name, and doesn’t clearly separate them. Someone in your organisation could have the ability to impact your business credit capacity or even your personal credit capacity.
2. Fraud: Defrauding customers, committing insurance fraud or otherwise misrepresenting something for material gain.
3. Criminal activity: Personal misconduct such as assaulting or abusing a customer.
4. Personal guarantees: Guaranteeing a business loan with personal assets and then being unable to make payments on it.

Some of these scenarios may seem far-fetched, especially if you’re a small business owner just starting out, or you’ve been in business for a long time where the status quo is entrenched. However, being aware of the risks is essential to staying on top of liability, and it’s doubly important when developing a company policy that addresses potential threats.

Self-employed and freelancer credit card liability

For self-employed individuals and freelancers, typically registered as a sole trader or partnership, it is crucially important to be clear about credit card liability.

• Personal liability is common. Most credit cards for the self-employed are personally guaranteed, meaning that you, as the cardholder, are personally liable for any debts on the card, even if they're for business purposes.
• Credit score impact. Since you're personally liable, any delinquencies or negative activity associated with the card can impact your personal credit score. This can then affect your ability to get another credit card, personal loan, home loan, or other forms of credit in the future.
• Expense management. If you have a single credit card and you run spending for both personal and business expenses through it, it can be tricky when it comes to doing your accounts and filing a tax return. One possible way to improve that would be to use additional cardholders to provide some form of segregation. Even so, it's a long way from the kind of business-friendly integrations possible with a proper business credit card.

Corporate credit card liability

Getting a corporate card for your business will shift liability over to the company, away from you, the owner.

It can also be a clever way to manage cash flow while letting your employees take care of the less-important purchases that keep the business afloat. And aside from giving yourself the freedom to delegate small-time tasks to trusted staff, it also delivers a range of benefits.

Rewards: There’s a wide variety of corporate credit cards on the market, and you should have no trouble finding one that delivers the type of rewards you’re after. That might be frequent flyer points, a low interest rate with no annual fees, or zero foreign transaction fees – particularly useful if you conduct business overseas and make regular international purchases.

Autonomy: With the right company credit card policy in place, you can rest easy knowing your staff will handle the day-to-day business transactions without having to take you away from the most important tasks. It can also instil in them a sense of autonomy and trust, meaning your team is more likely to form a cohesive unit and stick around for the long term.

Complete control: You get to control employee spending and even receive insights that can improve your business. With total oversight of corporate credit card spending, you’ll be able to monitor your cash flow in real-time and spot any areas that could be streamlined for a better bottom line.

Should you give employees a company credit card?

One of the easiest ways for companies to get into hot water is the use of a company’s business credit card to pay for personal expenses. Or conversely, having employees use a personal credit card to make payments for business-related expenses which will then be reimbursed. Either way, it gets messy.

If you’re a one-person operation, then sure, you aren’t as likely to be exposed to much credit card liability. However, the potential chaos of mixing your personal spending with business transactions should be reason enough to consider getting a separate business credit card.

And as you grow your business, the question of who’s responsible for debt will rear its ugly head, especially when you start bringing on new recruits.

In a time of rapid growth, it’s easy to delegate small tasks to employees without thinking through the consequences. If you run a café, for example, giving a new staff member your personal credit card to pay for a delivery may seem innocuous. But what happens if they betray your trust and misuse the card for personal gain? It’s horrible to think of, but how easy would it be for them to take note of your card details and charge items to your account without your knowledge?

It may seem obvious, but using a personal credit card for business-related expenses should be one of the first liabilities you eliminate as your company grows.

Besides, there are so many bonuses and rewards you can earn with the right business credit card for a small or medium-size company, or a corporate card for larger companies typically with revenues in excess of $10m.

Create a company credit card policy

Every part of a business involves risk. Giving your trusted staff access to a corporate credit card or charge card will open you up to risks. To combat these potential threats, you need to develop and implement a comprehensive policy surrounding the use of company cards.

Scale spending limits according to each role

One of the best functions of a corporate credit card is the ability to customise usage limits for individual employees. To make the most of this feature, take stock of all your employees and work out an appropriate limit for their expenses. Some corporate cards issuers can even restrict cardholders to spending in chosen categories.

For example, a member of the sales team who goes out on the road regularly will require a larger limit than an in-house IT worker who only makes minor business purchases every few months.

In all cases, take care to monitor the spending habits of your staff on an ongoing basis. The great thing about corporate and business cards is that all the spending information is recorded in one central location. That means you can monitor spending in real-time and ensure limits are not exceeded and personal expenses are not incurred.

FAQs

Are business owners personally liable for company credit card debt?

Liability depends on the credit card agreement. Some business credit cards hold the business owner personally liable, while others place the liability on the business entity.

What happens if an employee misuses a company credit card?

If the business owner has provided a personal guarantee and an employee has run up a large balance, the business owner may be held liable for the debt.

Can a business credit card affect the business owner's personal credit score?

Yes, if the business owner is personally liable and the card issuer reports activity to consumer credit bureaus, any delinquencies can impact the owner's personal credit score.