Debit vs Credit Cards - How They're Used in Business

Just as in everyday life, credit and debit cards have an important role to play in how we pay for goods when running a business. However, often little thought is given to which is used. It may be that you simply use the nearest one to hand or use them interchangeably, but each has a number of benefits and drawbacks depending on the situation. Taking a bit of time to understand the difference and how each can be used to best effect can, therefore, be a wise use of time.

Business Debit vs. Business Credit Cards

Both credit and debit cards can be used to make day-to-day purchases for your business: With a debit card, you're spending the money from your business bank account. With a credit card, you're spending on credit - this means you will receive a statement each month showing your transactions. You'll then have the option of paying the amount due in full or paying at least the minimum amount and accruing interest on the remainder.

While business credit cards work just like personal ones, it's worth noting that they don't enjoy the same protections as consumer cards. Section 75 of the Consumer Credit Act (whereby spending on a consumer credit card between £100 and £30,000 is protected if you don't get the item you paid for or you were given the wrong information) doesn't apply to business credit cards. Some providers do, however, offer extras such as cover against fraudulent use online or additional insurance to cover any misuse, so do shop around. You could even get cashback, Airmiles or shopping discounts.

Benefits of Business Credit Cards 

In addition to potentially getting these added extras, there are a number of other reasons why spending on a credit card could be a sensible choice. Credit cards offer more flexibility and so can be of use when managing your cash flow, especially when paying for expensive items. Having the option to pay in full or in part, plus being able to buy an item and not pay for it until the next bill is due, can all help with your cash flow needs. Even if you don't have additional fraud protection, the simple act of spending on a credit card can make it more likely that you'll be able to resolve any issues here as you haven't actually paid for the item; you've only charged it to your account. Also, if the worst happens and you are hit by fraud, it won't affect the money in your current account, and so funds for crucial things like payroll won't be impacted.

If you continue to use your business credit card responsibly, you'll also be in a better position to build your credit history, which can work in your favour if you need to access other forms of financing, such as loans. 

Drawbacks of Business Credit Cards 

When it comes to the downside of using business credit cards, fees and charges would be top of the list for many. This could include annual fees, additional card fees if you also want employees to have cards, foreign transaction fees, and charges for paper statements, and that's before any interest rates are taken into account. If you don't pay the card back in full and on time, you'll soon notice that those interest rates tend to be higher than on personal cards and other types of finance such as loans, so consider your options carefully. While being able to give other trusted employees a company credit card can be an advantage, enabling them to conduct necessary spending without having to submit expense claims, this can make it harder to keep track of spending and monitor where money is going. Using accounting software such as AccountsPortal can help here as you'll be able to view transactions and balances in real-time, helping to identify any suspicious activity quickly.

Benefits of Business Debit Cards

Using debit cards can also help you to avoid overspending as you can only spend what's in your account (plus any overdraft facilities you may have). While you may still spend more than you should on a debit card, you won't be able to run up large amounts of debt like you could with a credit card. This also means you won't have to pay any interest charges – in fact; you could even earn interest on any money in your account. It's also likely that there will be fewer fees associated with a debit card. Debit cards are also generally easier to qualify for than credit cards, even if you have a limited credit history.

Drawbacks of Business Debit Cards

Just like credit cards, debit cards also have a number of limitations, though. No matter how well you manage your spending, it won't be of any benefit to your credit score, for example. Also, you may find that you're unable to make purchases when your funds are low as you'll be limited to the amount in your account. If your card is lost or stolen, you may also face more issues as any money spent will be deducted from your account as soon as the card is used, putting your funds at immediate risk.

Both debit and credit cards give you fast access to cash, are convenient and are easy to operate and manage wherever you may be in the world. While day-to-day expenses may be more suited to debit card spending, larger purchases will likely benefit from the flexibility offered by a credit card. Whichever option you choose, the key is to ensure spending is tracked and monitored and any fees are factored into your budget.