Credit Cards vs. Debit Cards: What’s Right for a Business?
In fact, Wallethub lists that there are more than a dozen credit card companies, and those are just the largest ones. However, before you can compare credit card companies, you’ll need to decide whether it’s best to choose a credit card or a debit card for your business.
Although they seem similar at face value, credit and debit cards are very different. In this post, we’ll explain what you should know before choosing a credit or debit card to support your small business.
How Are Business Credit Cards and Debit Cards Different?
Credit Cards for Business:
Like personal credit cards, business credit cards offer you the ability to borrow money from the bank. In return, you promise to pay the balance off each month. There are many types of credit cards that can be issued to your business, and each one offers different benefits. Standard credit cards extend a simple line of credit, whereas some cards offer cashback or rewards every time you spend money on business expenses.
What Are the Benefits of Business Credit Cards?
Rewards can be an advantage when it comes to using a credit card for your business. If you use your credit card frequently and pay off your balance in full at the end of every month, those rewards can save you money in the future. Plus, many credit cards come with a statement credit, which can be a huge plus for business owners.
If your business has specific areas that you spend money on, you can choose a rewards card that helps you earn more for that type of expense. For example, you can get a card that offers travel rewards if you take business trips frequently. You’ll earn travel points after you spend, helping you save money in the future!
Security and consumer liability are another plus for credit cards. If you see something wrong and report it quickly (such as a charge you didn’t make on your business card), your responsibility for the loss is minimal.
Another benefit of using a credit card for business purchases is that you can build your business’s credit history. This is crucial, because establishing a good credit score will help you secure loans, obtain better interest rates, and much more.
What Are the Downsides of Business Credit Cards?
Since credit cards are a form of borrowing money, you may accumulate debt. If you do this, you’ll have to pay off expensive interest. In addition, facing a large credit card balance at the end of every month with insufficient funds to pay it off won’t be good for your business’s finances.
Annual percentage rates (APRs) can be quite high, so even if you pay the minimum amount that’s due each month, you’ll still pay interest charges, which will offset your card’s rewards.
Debit Cards for Business:
With a debit card, you can withdraw money directly from your bank account. In this way, using a debit card is very similar to using cash, since you can only spend an amount that you have in your checking account.
What Are the Benefits of Business Debit Cards?
One of the best parts about using a debit card as a spending mechanism for your business is that you don’t have to pay interest. The funds come directly from your account, and there’s no borrowing involved, which means you won’t risk accumulating debt.
In general, debit cards incur no fees, although some carry minimal fees. For example, if you try to withdraw more money than the amount you have in your account, you could be hit with an overdraft fee.
Using debit cards is also a great way to avoid debt and control your spending habits. Since you’re drawing from pre-existing funds, it’s difficult to spend outside your means.
What Are the Downsides of Business Debit Cards?
Security and liability concerns are a significant downside with debit cards. If a thief has your debit card and pin, they can steal money from your account in seconds. Since debit cards usually don’t have fraud protection like credit cards, it’s less likely that you’ll get your money back.
While some debit cards do offer cashback and rewards, most don’t have these perks. These types of cards are rare, and often charge fees that make the offer less appealing.
Conclusion: Which Financing Option is Right for Your Business?
It’s difficult to give a definitive answer to this question because every business is unique. You must evaluate your own business needs and choose a card with advantages that outweigh the negatives.
If you’re disciplined with money and standing on solid financial ground, choosing a business credit card route may be the way to go. However, if you’re not sure you can keep your credit spending down, start with a debit card. If you need help reviewing your spending, asking your business accounting team to monitor charges to ensure that you aren’t overspending.
If you’re still uncertain about your decision, have someone you trust help you analyze your financial situation. They may be able to help you decide on a financing option that’ll fit your business.
Does your business use a business debit or credit card? Share your tips with us in the comment section below!
Editor’s Note: This post was updated for accuracy and comprehensiveness in October 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.