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Business Credit Card vs. Business Debit Card: Compare the Pros and Cons

As a business owner, you have set up the company's finances to keep everything in order -- especially for bookkeeping purposes. 

Often, how you pay for your business expenses is a reflection of your habits.

You either pull out your debit card or your credit card and pay for your purchase. 

Before you make another business purchase, take a few minutes to learn about the differences between using a business debit vs. a credit card. 

Credit cards and debit cards are very different tools that have a number of benefits and drawbacks depending on which one you choose.

Here’s what you need to know.

Business Debit vs. Credit

Business debit cards and credit cards both allow you to make purchases to keep your business running, but they work in very different ways.

Business debit cards

Debit cards allow you to make purchases using the money in a bank account.

Typically, you have to insert the card’s chip or swipe the card then enter a personal identification number (PIN) to make a purchase. After the transaction is processed, money comes out of your bank account.

If you prefer not to use your business checking account as a source of funds, business credit cards may be a better option. 

Business credit card

Business credit cards give you access to a line of credit you can use to make purchases.

You can choose to pay the balance off in full or carry a balance and pay the associated interest costs.

It’s important to note:

Business credit cards do not have the same consumer protections and laws that apply to consumer credit cards.

Be sure you understand these differences before assuming a business credit card works the same as a consumer credit card.

Benefits of Business Credit Cards

Using a business credit card could be a smart move for many small business owners.

Credit card rewards

One of the most significant benefits of using a business credit card for card purchases is credit card rewards.

Some business credit cards allow you to earn rewards above the standard rate in categories your business may spend considerable amounts of money in. 

For businesses with tight margins, using a 2% cash back credit card could make a huge difference.

Of course:

Businesses that get discounts in excess of the rewards rate for paying in cash may be better of using other payment methods.

Manage your cash flow

The ability to finance purchases and manage your cash flow is another key benefit of business credit cards.

How so?

You can pay the balance off in full or choose to carry a balance and pay interest if it makes sense for your business’s cash flow needs.

If your business credit card offers a grace period and it is active, you can make a purchase then pay it off before the statement due date without paying interest.

This gives you a time period where you can float the purchase without paying financing charges.

Better fraud protection

Credit cards tend to offer you better fraud protections than debit cards.

Why?

Since you haven’t paid for the purchase yet and have only charged it to your credit account, credit card companies are more likely to act to get the issue straightened out. 

To make things even better:

The money hasn’t come out of the bank account yet. This means you don’t have to stress about how you’ll make payroll with the money missing.

Build business credit

If you use your business credit card responsibly, you will likely build your credit for your business.

This could eventually allow you to take out other types of loans that your company may need to grow.

Drawbacks of Business Credit Cards

Even though business credit cards have many benefits, they have drawbacks, too.

Fees

Credit cards sometimes come with a handful of fees you need to be aware of.

Many business credit cards charge late fees or returned payment fees. Some credit cards charge annual fees or fees for having employee cards. 

Fees shouldn’t be an issue if you carefully select the credit card before you apply and use it responsibly.

That said:

It’s easy to let things slip through the cracks and end up paying fees you wouldn’t have to pay with a debit card.

Interest

If you decide to carry a balance on your business’s credit card, you’ll have to start paying interest in most cases.

The reality is:

The interest rates on credit cards are typically much higher than other types of loans. 

If you can pay the credit card off fast, it may be more convenient to use a credit card than another type of loan.

Unfortunately, many people mistakenly believe they can pay off a credit card quickly but end up paying off the balance for years.

Overspending

With a business debit card, you can turn off overdraft protection and get denied when you don’t have funds available on your account.

Credit cards, on the other hand, allow you to borrow money and rack up a balance even if you don’t have money in the bank to pay it off in full.

Those that have trouble charging more than they can afford to pay off may be better off using a debit card.

Pros of Business Debit Cards

Business debit cards offer benefits credit cards don’t.

Harder to overspend

Business debit cards make it harder to overspend than business credit cards.

When you run out of money in your account, your debit card may be denied as long as you have overdraft protection and similar benefits turned off.

Of course:

You can still overspend if you have money in your account.

If you have a $500 budget for office supplies but $50,000 in your bank account, you can still overspend.

However, you can’t run into massive amounts of debt like you could with a credit card.

No interest and fewer fees

Because you can’t run up debt with a business debit card, you won’t have to pay interest charges.

This could save you a significant amount of money in interest charges.

In fact, some bank accounts even pay you interest for holding your money within them.

Business debit cards normally have fewer fees, as well.

For instance, you can’t make late payments because you’re spending the money in your account.

Cons of Business Debit Cards

Business debit cards aren’t all good, though. They have a few major drawbacks.

No rewards

While rewards are common with business credit cards, they’re rare with business debit cards. 

Most debit cards don’t offer any rewards or cash back for using them.

There may be rare exceptions, but don’t count on the rewards being anywhere near as good as the top business credit cards. 

Can’t build your credit

Since you aren’t borrowing money, using a debit card won’t help build your business’s credit.

If you will never need to borrow money to help grow your business, this may not be a problem. 

Unfortunately, many businesses do need access to credit to help them grow.

Using a debit card won’t help your business’s credit score improve to get you access to the other loans you may eventually need.

Fraud is trickier

Fraud with a business debit card is a trickier situation than a business credit card.

If a criminal fraudulently uses your business debit card, the money comes out of your bank account. The money is gone.

With a business credit card, you won’t have paid the credit card bill yet. This means the fraudulent transactions don’t impact your available cash and is a key difference.

If you need to spend money but it is in limbo waiting to be returned to you due to a fraud investigation, you could be out of luck.

You may not be able to make payroll or make other vital purchases while you wait for the investigation to be completed.

If you don’t have access to business credit, you won’t be able to finance these important transactions, either.

No access to credit

A bank account doesn’t offer a line of credit as a credit card does.

Credit cards give you the flexibility of having available credit when you need it and allowing you to pay your balance off when you don’t. Debit cards only allow you to use the money in your account.

While you may be able to occasionally overdraw with overdraft protection, you won’t be able to borrow $10,000.

This can be a massive issue if you come across an opportunity to grow your business but don’t have access to the funds you need to make it happen.

Pick the Solution That Works Best for Your Business

Now that you understand the major pros and cons of both debit and credit cards for businesses, you can pick the option that works best for you. 

You don’t have to choose one or the other if you don’t want to.

Notably:

You can have both a business credit card and a business debit card.

When you get discounts for paying with a debit card with a merchant you trust, you can use your debit card to save money for your company. 

When you’re making a purchase online with a retailer that doesn’t offer a discount, you can take advantage of the benefits business credit cards offer.

Ultimately, you have to decide what is in the best interest of your business.