A business credit card is an incredibly powerful tool for your small business. You can use its security and to expedite purchases while you earn rewards end enjoy cardholder benefits. In addition, you have the option of adding your employees as authorized users on your account. Yet doing so has several advantages and drawbacks that are worth seriously considering before you request new cards.
The Advantages of Adding an Employee to Your Company Card
There are many reasons why you might want to add your employees to your credit card account as authorized users. First, you may wish to grant your employees the power to make company purchases on your behalf. This can be vastly more convenient than conferencing you in on purchasing orders to authorize payment, or requesting employees make purchases themselves and submit expense reports.
1. They Can Avoid Interest Charges
Furthermore, some of your employees may be unwilling or unable to charge company expenses to their personal credit cards, and seek reimbursement later. Roughly half of all American credit card users will carry a balance on their personal cards during all or part of the year, according to a 2016 Gallup study. Those who make charges on behalf of their employer, and are carrying a balance, will incur interest charges that they will not be reimbursed for.
2. You Earn the Rewards
And as the primary account holder, you can earn rewards from your employee’s company purchases when they are authorized cardholders. For example, if you have several employees who use cards from your small business account to purchase travel reservations, then you could earn valuable points and miles from these charges. However, your employees will still retain any points and miles that are offered directly to travelers by the airlines or hotels. Keep in mind that getting a business credit card with rewards tends to require an excellent or good credit score (though some cards are available to those with fair credit) and these cards generally carry higher APRs than non-rewards cards.
3. Purchase Protections
Also, your employee purchases will be eligible for any travel insurance and purchase protection benefits offered by your small business credit card. Finally, many small business cards include valuable summaries and reports that can simplify your accounting procedures when employees use their cards for company expenditures.
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The Disadvantages of Employee Credit Cards
While there are some good reasons to add your employees as authorized users, there are some risks that you need to address.
1. You’re on the Hook
As the primary account holder, you will be personally responsible for the repayment of all charges to your small business credit card, including those made by employees.
Therefore it’s important that you set clear guidelines for the usage of employee credit cards. You should specify that employee credit cards are only to be used for authorized company purchases, not personal charges. You should also put in place accounting procedures to ensure that employee purchases are reconciled, and that no abuse occurs. The best practice is to put your policies in writing, and have the employees sign it and retain a copy of the policy.
Many credit card issuers will even allow you to set limits on the charging ability of specific employees, which is another safeguard that you can use against potential abuse. For example, American Express’s small business cards allow you to set up alerts that can monitor employee spending and notify you of irregular activity. Also, Citi’s small business cards allow you to set a unique credit limit for each employee.
2. Your Business Credit Score Could Be Impacted
Let’s say your employee violates the rules you lay out to prevent abuse and charges a $15,000 vacation to your company card. Your recourse is to dispute the charge with the credit card issuer, citing fraud, and to punish (ideally, fire) that employee and make him or her pay back the $15,000. But what if they don’t or can’t pay you back? You have legal resource, but in the meantime, you may default on the card because you just simply don’t have the cash on hand. That default will do serious damage to your personal and/or business credit scores, depending on how the credit card issuer reports to the credit reporting agencies (here’s a quick chart of issuer policies on this). That could keep you from getting another business credit card for an upstanding employee down the road or even cost you thousands in higher interest rates on loans or lines of credit. (You can see where your personal and business credit stand for free at Nav.com.)
The Bottom Line
By taking the time to understand all of the potential benefits and drawbacks of adding employees as authorized users, you can make the right decision for your company.