Before you can make an informed decision about using a business debit card or a business credit card, you have to understand the differences between the two – and there’s a lot of them.
Business credit cards give you access to a revolving line of credit that you can use to make purchases. In exchange, you pay interest and fees on your balance, known as the annual percentage rate or APR. The APR is the annual total cost of borrowing and comes in these varieties:
Also, many business credit card issuers offer loyalty programs that give users cash back or rewards points on purchases.
The following are examples of types of business cards you can secure to manage company transactions:
With this type of business card, you won’t earn extras like airline points. However, a standard business credit card may provide a lower interest rate than other types of cards. Also, you may not have to pay an annual fee. A standard card may also have a predetermined spending limit.
A rewards business card provides special incentives for business owners. The business owner may be able to collect airline points for travel or to use toward hotel bookings. Reward cards may also give cash back on purchases.
A secured credit card is backed by a cash deposit. It allows you to use the funds without going over budget. Many startups or businesses with poor credit choose secured business cards to build up their credit score.
A business charge card is a type of unsecured business credit card. With this type of card, money isn’t removed from your business’s checking account. These types of cards also usually don’t have preset spending limits.
A debit card is tied to your bank’s checking account and serves as a payment card. The money to fund it is directly deducted from your bank account. You don’t have a credit line with a debit card, so whatever is in the bank account is what you can spend. You also don’t have to worry about the APR, since there is no interest.
Knowing the difference between a business credit card and a business debit card is the first step in figuring out what’s right for you. Before you can make the final determination, you have to delve deeper into the pros and cons of both.
A standard debit card can be used in the same way as a personal debit card, but funds are withdrawn from your business’s checking or savings account. A PIN is also required to use the debit card.
A business wouldn’t have an EBT card, but it may accept one as a form of payment. According to the United States Department of Agriculture, an EBT card works like a debit card and can be used to purchase food items from authorized retailers.
Instead of withdrawing money from a checking or saving account, you supply a cash deposit to use this type of business debit card. Some prepaid debit cards can be reloaded, and the reloadable amounts can vary from a few dollars to thousands of dollars.
Before approving your business credit card, the card issuer looks at your personal and business credit scores, as these indicate your creditworthiness and credit history. The issuer wants to know that you can pay it back if it extends credit to you, so the higher your score, the easier it is to obtain credit. Business owners with lower credit scores tend to pay a higher APR, and those with poor credit may only qualify for a secured card. If your enterprise can’t pay the debt on your business credit card, the credit card company can come after your personal assets.
The credit card industry is competitive, so issuers offer a lot of perks for signing up with them, whether you’re looking for a personal or business card. There are often sign-up bonuses, cash-back rewards, and rewards points that you can redeem for travel, retail, and entertainment. Choosing a credit card presents business owners with good credit opportunities to reap various rewards. Take a cash-back credit card for one example: If it pays 2% cash back on all purchases, the savings can quickly add up. There are also cards that give you extra rewards points or higher cash-back rates for purchases in a certain category, such as travel, gas, dining and entertainment.
Many business credit card issuers offer an introductory APR of 0% on new purchases for a year or more. If your business needs to purchase a pricey piece of equipment, this type of credit card may be attractive.
Some business owners choose to put all their monthly expenses on a business credit card. They either pay it off each month or carry a balance. The latter can be extremely costly, but if you can avoid carrying a balance, the benefits are plentiful.
The pros of using a credit card tend to outweigh the cons, but it all boils down to how you use the credit card. If you carry a balance, there are some big negatives to consider.
Business credit cards have a lot of benefits, but whether you should use one to run your business comes down to your financial temperament. If you have the cash in the bank and you know you’ll pay off your balance in full each month, it makes sense. If you think you’ll charge more than you can afford to the card and/or carry a balance, you may want to reconsider.
Lots of business owners are averse to debt. They don’t want to get hit with interest and prefer to pay with the cash they have on hand. They’re the ones who use debit cards. Before you decide if you want to join this group, consider the pros and cons of business debit cards.
There are many reasons to like debit cards. The biggest one is the lack of debt you incur, but there are others to consider as well.
A debit card can help you avoid new debt, but it can also harm you financially. Here’s how:
If you’re looking to build your credit and want access to more money than you have in the bank, then a debit card isn’t for you. But if you prefer paying with cash and don’t care about getting cash back or other rewards, then a debit card is the way to go.
Ultimately, deciding between a debit card and a business credit card comes down to how you handle money. If you know you’ll pay it off every month, a credit card has a lot of perks. If you have self-control issues, a business debit card is the better bet.
“It comes down to willpower,” said Rossman. “In some circumstances, it might be better to stick with a debit card.”