Credit and debit cards can be important to a business’s cash management strategy. From customer payments to corporate expenditures, there are many areas where credit and debit cards can help improve your business’s finances. Credit cards accounted for over 27% of point-of-sale (POS) transaction value worldwide in 2023, and debit cards had over 22% market share—highlighting both payment methods’ popularity. While credit and debit cards might seem similar to their users, businesses should be aware of their differences.

Your business can strategically use credit and debit cards by understanding how and when to use each card to your maximum benefit. Credit cards and debit cards offer distinct advantages, risks, and functionalities that can strengthen your business’s financial management and security. We’ll discuss the specific uses, benefits, risks, and costs of using credit and debit cards for your business.

What’s in this article?

• How do credit cards work?
  
• How do debit cards work?
  
• Credit cards vs. debit cards for businesses
  
• Should you use credit cards or debit cards for business expenses?
  
• Best practices for managing credit and debit cards for business
  

How do credit cards work?

Credit cards can offer your business a way to increase sales, control and defer expenses, manage short-term financing needs, and enhance your credit profile. But they require careful management.

Businesses that accept credit card payments can serve more customers than those that do not. That market access and potential revenue comes with the cost of transaction fees and delayed transaction settlement, but most businesses find the trade-off to be worthwhile.

Businesses can also use credit cards to handle their own expenses. Credit cards can defer payment until the statement due date, which helps businesses maintain higher cash balances in the short term. This deferral can be used to earn interest on available cash, or to invest in short-term, liquid assets. Other advantages include being able to track spending in real time, as well as access to receiving rewards and cash back.

Credit cards can also serve as a short-term credit line. When businesses face temporary cash shortages, credit cards can fill the gap without the need for a traditional loan. This can be especially helpful when covering operational costs while waiting for receivables to be paid.
Businesses should note that the high interest rates on carried balances can quickly increase their financial costs. However, regular use and timely repayment of credit card bills can also help a business build a strong credit history, which could be beneficial for securing larger loans with more favorable terms in the future.

How do debit cards work?

A debit card can also be a reliable and cost-effective method for businesses to collect payments and manage expenses. Having immediate access to funds and lower transaction fees can improve the company’s day-to-day finances. Meanwhile, the reduced risk of chargebacks following customer disputes and the ability to control employee spending can help keep the finances straightforward and secure.

Directly connected to the business’s bank account, a debit card is a simple way to purchase goods and services needed for daily operations. Unlike credit cards, which allow the company to borrow funds up to a certain limit, debit cards draw upon the company’s available funds.
Transaction fees for debit card payments are usually lower than those for credit cards, which can make them a more cost-effective option for businesses. This becomes particularly noticeable as transaction volumes scale up. Lower fees can lead to substantial savings and can be a significant factor for small businesses on a tighter budget.

Debit cards also do not allow for the same kind of spending flexibility as credit cards. There’s no grace period in which to pay without interest, as the money comes directly out of the customer’s account at the time of purchase. This means businesses have less concern over customers’ creditworthiness or their ability to pay later, which simplifies the sales process.

Businesses can find that using debit cards for their expenses offers direct control over cash outflows. Transactions are immediately deducted from the business’s bank account, aiding in real-time budget management and reducing the risk of overspending. This direct transaction method helps businesses monitor their day-to-day financial activity.

Unlike credit cards, debit cards don’t offer a line of credit, which means businesses must have adequate funds in their accounts to cover their transactions. This requirement can encourage disciplined financial management, but it also requires careful cash flow planning to ensure sufficient funds are available. Consistent and responsible debit card use is recorded by banks and can positively reflect on the business’s banking history, although it doesn’t affect credit score.

Businesses that issue debit cards for employee use have an advantage in expense management: preloading cards with set funds allows businesses to delegate spending authority while still maintaining control over the amounts spent.

Credit cards vs. debit cards for businesses

Credit and debit cards, while similar in appearance and general function, can be used for different purposes and in different scenarios. Here’s a rundown:

Credit cards

Credit cards are frequently used for:

• Purchasing power: By extending a line of credit, they help your business make purchases even when sufficient funds are not available.

• Online transactions: These are highly favored for online purchases because of the protection offered against fraud.

• Business expenses: They’re often used by businesses to manage expenses because of how easy it is to track transactions and issue cards to employees.

• Building credit: Both individuals and businesses use them to build credit history, which can be beneficial for future financial endeavors.

• Rewards and benefits: Many companies prefer credit cards for the rewards, such as cash back, travel points, and other incentives.

• Large purchases: They are ideal for large or capital expenditures that can be paid over time, taking advantage of the credit card’s grace period.

Debit cards

Debit cards, on the other hand, are commonly used for:

• Direct access to funds: Debit cards provide real-time access to the user’s bank account funds for everyday purchases.

• ATM withdrawals: They are the go-to for withdrawing cash from ATMs.

• Budgeting: They help in managing budgets, as spending is limited to the current account balance, which prevents overspending.

• Point-of-sale transactions: Widely used for daily transactions, especially where credit cards might not be accepted because of higher merchant fees.

• Small purchases: Debit cards are commonly used for small, routine purchases because of the immediacy of the transaction and the absence of interest charges.

• Banking features: They charge fewer fees and provide standard banking functions such as direct deposits and bill payments.

Both types of cards offer convenience and a record of transactions, but there are significant differences in how they promote financial management and strategic planning.

Benefits of using credit cards vs. debit cards

Many of the nuanced differences and benefits of credit cards and debit cards can be easily overlooked by businesses and customers.

• Benefits of using credit cards

  • Credit building: Regular use and prompt repayment can improve a business’s credit rating, which can be beneficial for obtaining loans with favorable terms in the future.
    
  • Cash flow management: Credit cards allow businesses to make purchases and defer the actual cash payment until the bill is due, which can help in managing short-term liquidity.
    
  • Rewards and incentives: Many credit cards offer rewards programs, including travel points, cash back, and discounts on business-related services. These rewards can yield significant savings.
    
  • Purchase protection: Credit cards often provide consumer protections such as insurance on purchases, extended warranties, and fraud protection—which can reduce business liabilities.
    
  • Expense tracking: They can simplify expense tracking and reporting, as they provide itemized records of all transactions. This can aid budgeting and tax preparation.
    
  • Emergency funds: Credit cards can serve as a contingency fund for unexpected expenses, providing a safety net without dipping into cash reserves.
    

• Benefits of using debit cards

  • Budget discipline: Debit cards draw from existing funds, which helps businesses avoid overspending and maintain budget discipline.
    
  • Lower fees: Typically, debit cards have lower transaction fees than credit cards, which can save money on operational costs.
    
  • Reduced fraud liability: PIN-based transactions add a layer of security. And since funds are drawn directly from the bank account, there is generally a lower limit of liability for fraudulent transactions.
    
  • Immediate transaction closure: Transactions are completed immediately, providing a clear and up-to-date picture of a business’s available funds.
    
  • No interest charges: Since debit cards don’t involve borrowing money, there are no interest charges associated with their use, which helps with cost control.
    
  • Simplicity: Debit cards are straightforward financial tools that reduce the need to worry about monthly payments, interest rates, or credit limits.
    

The choice between using credit and debit cards can also depend on the size and type of business, the nature of its expenses, and its financial policies. Credit cards might be better for businesses that need the flexibility to manage cash flow or finance larger purchases over time, while debit cards might be preferable for businesses focused on strict budget adherence and low transaction costs.

Risks and drawbacks of using credit vs. debit cards

It’s important to assess the potential risks and drawbacks associated with credit and debit cards for business expenses.

• Risks and drawbacks of using credit cards

  • Debt accumulation: If not managed properly, it’s easy to accumulate debt due to the ability to spend money that the business does not currently have.
    
  • High interest rates: Carrying a balance on credit cards can incur high-interest rates, significantly increasing the cost of borrowed funds.
    
  • Complex fee structures: Credit cards can have complex fee structures. These might include annual fees, late payment fees, and fees for going over the credit limit—which can add to the cost of using credit.
    
  • Impact on credit score: Mismanagement of your company credit card, such as late payments or high usage, can negatively impact your business’s credit score.
    
  • Fraud risk: While there is protection against fraud, credit cards are still vulnerable to predatory activity, and dealing with disputes can be time-consuming.
    

• Risks and drawbacks of using debit cards

  • Immediate deduction of funds: Transactions immediately deduct funds from the business account, which can be problematic if there’s a dispute or incorrect charge.
    
  • Less fraud protection: Debit cards traditionally offer less protection against fraud than credit cards, and resolving unauthorized transactions can result in temporarily lost funds.
    
  • Overdraft fees: If a transaction exceeds the account balance, it can result in overdraft fees (unless the business has opted out of overdraft protection).
    
  • No credit building: Debit cards do not contribute to building a business’s credit history, which can be a disadvantage when applying for business loans or lines of credit.
    
  • Lower transaction limits: Debit cards often have daily spending limits, which can hinder the ability to make large purchases or bulk orders necessary for business operations.
    

Both credit and debit cards have their own set of potential pitfalls. Credit cards require disciplined use to avoid the trap of high-interest debt, while debit cards necessitate vigilant cash management to ensure that there are sufficient funds for transactions. Your business’s financial stability, cash management practices, and risk tolerance should inform your card choice.

Costs of using credit vs. debit cards for business

The costs associated with using credit and debit cards can influence a business’s decision on which to use for transactions. Here’s a look at the costs for each.

• Costs of using credit cards for business

  • Interest charges: If the balance is not paid in full, the business incurs interest charges, which can be quite steep depending on the credit card.
    
  • Annual fees: Some credit cards charge annual fees, especially those offering significant rewards or benefits. These can range anywhere from $95 to $500, or more.
    
  • Transaction fees: Businesses pay a fee for each transaction processed, known as the merchant discount rate, which is usually between 1% and 3%. These charges are typically higher for credit cards than for debit cards.
    
  • Cash advance fees: Withdrawing cash through a credit card is costly due to cash advance fees and higher interest rates for cash advances.
    
  • Foreign transaction fees: Businesses that deal with international transactions can incur additional fees for currency conversion and processing.
    
  • Late payment fees: Missing a credit card payment can result in late payment fees and potential increases in interest rates.
    

• Costs of using debit cards for business

  • Transaction fees: While typically lower than credit card fees, some debit card transactions can still incur fees—often at a flat rate (instead of the transaction percentage as is common with credit cards).
    
  • Overdraft fees: If a transaction exceeds the account balance and overdraft protection is in place, the business could face substantial overdraft fees.
    
  • ATM fees: Using an ATM outside of the bank’s network can incur fees, which can add up over time, especially for businesses that frequently withdraw cash.
    
  • Card replacement fees: There might be a cost for replacing lost or stolen debit cards, which can be an administrative hassle as well as a financial one.
    
  • Foreign transaction fees: Similar to credit cards, international transactions can attract additional fees for debit cards.
    

Debit cards are generally less expensive than credit cards in terms of fees and interest. That said, credit cards come with higher costs that can be justified by the benefits they offer, such as credit building, rewards, and cash flow management. Businesses must carefully consider how they use each type of card to minimize costs and maximize benefits. For example, paying off credit card balances in full can help you avoid interest charges, while monitoring account balances can prevent overdraft fees on debit cards. Try to strike a balance between the utility provided by each type of card and the associated expenses.

Safety and security of credit vs. debit cards

Safety and security are important when considering financial tools for business transactions. Credit and debit cards offer various features designed to protect users, but they also have inherent risks.

• Safety and security of credit cards

  • Fraud protection: Credit cards typically offer strong fraud protection. Businesses are not held liable for unauthorized transactions if they report them promptly.
    
  • Chargebacks: If a vendor charges the business for products or services it did not deliver or had misrepresented, the business can request a chargeback and might be able to have its funds returned by the card issuer.
    
  • Credit limits: The credit limit acts as a ceiling for fraudulent charges, which limits the business’s exposure to risk.
    
  • Monitoring services: Credit card companies often provide monitoring services that alert businesses to potentially fraudulent activity.
    
  • Encryption and tokenization: Advanced security measures such as encryption and tokenization are used during transactions to protect card information.
    

• Safety and security of debit cards

  • PIN security: Debit cards typically require a PIN for transactions, adding an extra layer of security.
    
  • Direct account access: The direct link between the business’s debit card and bank account is convenient, but it could lead to significant loss from unauthorized usage.
    
  • Limited liability: The liability for fraudulent debit card transactions can be limited if reported too late, since the window for reporting is typically much shorter than with credit cards.
    
  • Real-time monitoring: Many banks offer real-time monitoring and alerts for debit transactions, helping your business quickly identify and respond to unauthorized use.
    
  • Zero liability policies: Some banks offer zero liability policies for debit cards, but these can come with more terms and conditions than credit cards.
    

While both types of cards have safety features, credit cards generally offer more comprehensive protection against fraud and unauthorized transactions. The key for businesses is to ensure that all cards are used responsibly, with strong internal controls and monitoring in place. It’s also important to educate employees about security practices, such as protecting PINs and reporting lost or stolen cards immediately.

Credit cards tend to offer a larger window than debit cards to report fraud without incurring penalties or fees, but it’s important to respond promptly to any security breaches you could encounter with your business’s debit and credit cards.

Should you use credit cards or debit cards for business expenses?

When deciding whether to use credit or debit cards for your company’s expenses, keep these three factors in mind: your financial management strategy, the nature of the expenses, and the specific needs of the business.

When to consider credit cards

• For using credit: If your business wants to use credit to manage cash flow or finance purchases over a billing cycle without immediate cash outlay, credit cards are a suitable choice.

• For building credit history: To establish or improve a business’s credit history, which can be beneficial for future financing needs, using a credit card responsibly can be advantageous.

• For rewards and perks: Credit cards might be a beneficial choice if the business can take advantage of rewards—such as cash back, points, or travel benefits—and if these perks outweigh the costs of using the card.

• For expense management: Credit cards can help you manage expenses, providing detailed reports for better tracking and categorization of spending.

When to consider debit cards

• For immediate expense tracking: If real-time expense tracking is important to your organization, a debit card provides an up-to-date reflection of spending.

• To avoid debt: If you want to maintain a strict budget and avoid the possibility of accruing debt, debit cards ensure spending is limited to available funds.

• For lower fees: Debit cards can save on transaction fees and avoid interest charges, which can accumulate with credit cards—especially if the monthly balance isn’t paid in full.

• For simplified accounting: Debit cards can simplify accounting, as they do not require the additional step of paying a credit card bill.

Best practices for managing business expenses with credit and debit cards

Regardless of the type of card used, businesses should:

• Establish a clear usage policy and communicate it to all cardholders.

• Regularly review transactions to detect any unauthorized or fraudulent activity.

• Set appropriate credit limits and monitor debit account balances to maintain control over spending.

• Make sure to pay a credit card’s monthly balance in full to avoid interest charges.

• Use financial software to better manage card transactions and streamline accounting.

Many businesses use both debit and credit cards to diversify their financial management strategy while mitigating the risks of each.

Best practices for managing credit and debit cards for business

Managing credit and debit cards for your business requires a thoughtful approach and discipline. It’s important to balance the need for convenience and accessibility against the risks of fraud and overspending. Here are some best practices:

• Always separate personal and business expenses: Your employees should always use different debit and credit cards for business and personal transactions. This simplifies accounting and tax preparation.

• Choose the best credit card for your unique needs: Consider what your business spends most on and select a card that offers rewards or cash back in those categories. Make sure to also pay attention to interest rates and annual fees.

• Use credit cards for more flexible cash management: Because credit card balances do not have to be paid off immediately, they can help your business manage short-term cash requirements. Just remember to pay off the monthly balance in full to avoid interest charges and impacts to your credit score.

• Set spending limits and alerts: Most debit and credit card issuers allow you to set spending limits and alerts for transactions, which can prevent unauthorized or accidental overspending.

• Regularly review statements and transactions: Check your debit and credit card statements and online accounts frequently to quickly catch any unauthorized transactions.

• Use mobile and online banking to your advantage: Online and mobile banking tools help you track spending, pay bills, and manage your debit and credit card accounts in real time.

• Educate employees on card use and security: If your employees have access to company credit and debit cards, make sure to provide clear guidelines on what constitutes acceptable usage. You might also want to send regular reminders about security best practices, such as not sharing card details.

• Implement strong security measures: Protect your company credit and debit card information with strong passwords and PINs, two-factor authentication, and secure networks. Be wary of phishing scams and suspicious emails or calls.

• Take advantage of rewards and benefits: Many business cards offer rewards programs and additional benefits such as travel insurance, extended warranties, and purchase protection. Use these to your business’s advantage.

• Regularly assess your card needs and usage: As your business grows, your needs might change. Regularly assess whether your current cards are still the best fit, and if you need additional cards or different types of cards.