The Real Problem With Letting Employees Use Personal Cards for Business

Small companies all started in the same place: employees used personal cards to cover work expenses and submitted receipts for reimbursement. It’s effective when there’s a small team and small amounts needed. But it creates unintentional consequences that no one expects until they’re dollars—and hours—spent later.

The Impact On Employee Cash Flow

When employees front the money for the business, they consider it a de facto interest-free loan to the company. They have $800 for a flight or $300 for dinner that they need to cover but the company will pay them back; however, that $300 comes out of their grocery bill. When they pay it back, it costs them.

For employees who have no money beyond their paycheck to paycheck existence this is detrimental. They’re using their rent money to pay for employer costs hoping they’ll get reimbursed in a timely manner (what’s timely? Two or three weeks? It’s too long.) They’re incurring debt—or interest—on money they have no business using.

It’s a precursor to getting hired where employees avoid doing certain things because they’d rather not pay out of pocket. They forego a lunch meeting or a higher-end meal option because they’re concerned about having to use their own money.

The Accounting Mistakes

From an accounting perspective, this is a nightmare. Every receipt must be tracked, categorized, matched with the general ledger, inputted, verified, approved and paid.

It’s far too much manual labor. And manual labor equals errors. Receipts can be incorrectly categorized, lost, and personal items can inadvertently sneak in with accounting options.

Companies with corporate cards do not have this issue as the assumption is that everything is occurring in one space and computerized categorizing and matching is an expected component.

Then come tax season, it’s even worse. The IRS needs real-time verification of business-related costs; when they’re across multiple lines on personal credit cards, it takes time—and sometimes, it’s impossible—to make legitimate sense.

The Hassling of Receipts

Ask any accountant and receipt collection will probably be among the top three least favorites of reimbursements.

Employees don’t turn them in. They forget to take pictures. They provide expense sheets and forget half of them and say they’ll send them later—and they don’t. They send blurry pictures.

This requires additional menial back and forth for the employee, and accounting department, which can overlook expenses due to insufficient documentation.

This issue compounds with scale when there’s a team of five people that two receipts got misplaced—but when there are fifty people, this is another full-time job.

The Invisibility of Spending

When employees use personal credit cards, no one knows how much anyone is spending when the receipt comes through—maybe weeks later.

That insight is delayed which complicates budgeting efforts. If team A is already at budget capacity for meals no one will know until a receipt gets handed in—but by then, they’ve spent the money and eaten the meals.

With corporate cards, spending gets seen in real-time. If someone is blowing through a category for spending on meals, finance will know sooner rather than later to inquire before funds deplete.

The Expenses Policy Precedent

No one wants to be a micromanager—but most companies have a spending policy for what meals can cost per purchase, what can be bought at all and what’s subject to reimbursement.

Enforcing this policy from an employee standpoint is murky at best.

An expense occurs first and is evaluated second; if an employee spends $100 on dinner but the policy states $50 is maximum—what happens? The employee loses $50?

With corporate cards, policy can be enforced prior to purchase. Spending limits can be set; exclusions can be enacted; pre-authorization can be required. The employee knows what’s right and wrong before swiping.

Personal Credit Impact

When employees use their personal credit cards, those charges reflect on their personal credit report.

They’re negatively impacted by their credit utilization ratio; when an employee uses their card for $5,000 worth of expenses for an overseas trip it’s on the credit report although they’ll eventually pay it down with reimbursement.

It doesn’t matter; if they don’t have the financial means to sustain that payment—it’s all on paper.

The Tax Implications That Make Everything Complicated

When employees use personal credit cards as part of their role responsibilities, it complicates any reporting obligations come tax time.

The more discrepancy is not clean or otherwise assumed to be reoccurring additional wages given to employees, things get taxed.

Some companies will over-simplify things by providing additional wages should an expense be anticipated; this is taxable income—an employee now must pay taxes on what they effectively gave themselves discretionary fund allowance for business purchases?

Then there’s an aspect of earning credit card points/cash back for purchases made with corporate money—they’re subject to taxes—punished on something they should have never been deemed personally responsible for.

Different companies have different approaches—but it gets complex fast.

How It Drags Down as Companies Scale

So far, it works when a company starts with three employees. Sooner or later, between 10 and 30 employees—it becomes untenable.

At some point, the administrative burden becomes too much of someone trying to collect all those reimbursements, gather receipts, approve/reject everything and answer questions.

That’s when companies generally pivot toward offering company-sponsored credit cards.

It’s not that using personal credit cards becomes burdensome—it just doesn’t scale as easily when there’s additional employees taking away from other full-time tasks essentially making it part-time work for office company credit inquiries.

The Employee Burden

For employees using personal cards becomes burdensome. They need to keep track; gather receipts; save expense notes; fill out forms; if things do not come quickly—they feel stuck.

It’s ancillary work that provides no value to ease-of-function-and-pay—it makes it frustrating to be an employee while payments lag for approved transactions.

Good employees won’t leave over reimbursement policies—but it adds insult to frustration.

The Conclusion on Employee Company Credit Use

Allowing employees to spend on personal cards becomes hidden costs that don’t seem like much at face value or in practicality—but behind-the-scenes hours spent sorting out appropriate accounting make more sense for company-issued cards sooner rather than later instead of retrospectively when paying persons becomes too much down the line.

A little reimbursement makes sense for little teams with sporadic expenses; as time goes on and bigger teams emerge—percentages accrue as hidden losses which overwhelm any comfort found in utilizing personal cards. Ultimately it makes sense over time and less expensive to just provide corporate cards for all at some point.