When you know how to use business credit cards to your advantage and avoid the potential downsides, they can be a critical part of building a cohesive financial strategy for your business.

Business credit cards can be effective tools to manage and track your spending. They can also help you make necessary purchases to improve and grow your business while optimizing payments so you can maintain the level of cash flow that makes sense for you.

Is credit card interest a business expense?

The IRS defines business expenses as those that are ordinary and necessary. An ordinary expense is one that's common and accepted in your trade or industry. This could include a new water filter for employees in your office, for example, even though it doesn't directly generate revenue. A necessary expense is one that's helpful and appropriate for the business, like a manufacturer paying for raw materials.

The interest you pay on debts—including credit cards—may qualify as a tax-deductible business expense, as long as the purchase you made with the card was for your business. This can include travel expenses, office supplies or monthly rent for a storage facility.

If you use a credit card for both business and personal purposes, you can only deduct the portion of the interest that's charged on your business purchases. Business credit cards often provide itemized year-end statements that make it easy to gather information to prepare your tax return.

How to effectively manage business credit cards

Credit cards make purchasing goods and services fast and easy. Some offer perks like price guarantees and extended warranties, while others deliver rewards like airline miles and cash back. Many cards offer rewards on regular business expenses like travel, utilities, phone bills and restaurants. Paying for everyday business expenses with a credit card can maximize your rewards or cash back.

However, business credit card interest can have downsides if it's left to grow or isn't used responsibly. This is why it's essential to follow some best practices with your business credit cards.

For example, avoid using credit cards for big-ticket items like real estate or equipment. These major investments are typically best handled through business loans instead of credit cards because loans typically have lower interest rates.

Similarly, use a card to purchase items that are truly necessary for your business and that have a clear connection to helping you make money. It can be tempting to buy today and worry about paying it back tomorrow, but this can result in taking on too much debt. Make sure you can afford to pay for the purchase in a timely fashion before charging it.

Finally, always pay your bill on time. If you don't, you'll likely get hit with a late fee on top of your interest charge. Late payments may negatively impact your business credit score, which can affect your chances of getting a loan in the future. If you pay off your balance each month, you can avoid paying interest altogether.

Hold onto your receipts

While your credit card statement will provide proof of interest payments, make sure to keep receipts documenting the purchase itself. You'll want to verify charges when you pay your bill. It also helps to have the necessary documentation for taking a tax deduction. A credit card statement alone isn't sufficient proof for tax purposes.

When handled responsibly, business credit cards can be powerful tools that deliver convenience, rewards and easier expense tracking. Use a credit card rewards earnings calculator to find the best card for your business.