Should You Use a Business Credit or Debit Card?

What is a business credit card?

A business credit card is much like a personal credit card: You use it to make purchases on credit and then pay for those purchases when you receive your credit card bill. Qualifying for a business credit card gives you access to a revolving line of credit that you can use for business expenses. 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:

• An introductory APR is the promotional interest rate you pay for a set amount of time, such as the first year of your account.
• The purchase APR is the interest rate you pay on all purchases.
• The balance transfer APR is the rate charged on debt transferred from another credit card or line of credit.

Types of business credit cards

Compared to business credit cards, there are fewer business debit card types to choose from.

Standard debit card

A standard debit card can be used in the same way as a personal debit card, but funds are withdrawn from your business’s checking or savings account instead of your personal account. A PIN is required to complete each transaction.

Prepaid debit card

Instead of withdrawing money from a checking or savings account, you supply a cash deposit in advance to use this type of business debit card. Some prepaid debit cards can be reloaded, and the reloadable amounts vary from a few dollars to thousands.

Business debit card characteristics

Business debit cards function similarly to personal debit cards but are linked to a dedicated business checking account. Here’s a breakdown of their key characteristics and how they differ from business credit cards.

• Direct debit: The cost of purchases is immediately deducted from your business checking account balance. This ensures you only spend funds you have readily available, promoting responsible cash flow management.
• No spending limit: Unlike credit cards, business debit cards don’t have a preset spending limit. However, transactions may be declined due to insufficient funds in your checking account.
• Minimal fees: Business debit cards typically boast lower fees compared to credit cards. Common fees might include monthly maintenance fees, ATM withdrawal fees and foreign transaction fees.
• Limited rewards: While some business debit cards offer rewards programs, they are generally less common and less lucrative than those offered with business credit cards.
• Faster approvals: Obtaining a business debit card is often easier than getting a business credit card. Requirements are typically less stringent, especially for new businesses.
• Improved spending habits: Because transactions are deducted immediately, business debit cards offer real-time insight into your spending patterns and bank account balance. This can aid business owners who otherwise struggle with budgeting and financial control.

Pros and cons of a business debit card

There are many reasons to like business debit cards. The biggest one is the lack of debt you incur, but there are others to consider as well. Before you make a final determination on whether a business debit card is right for your company, you should understand all the pros and cons.

Pros of a business debit card

• It’s easy to get. Unlike a credit card, a business debit card is tied to your business checking account, which makes it much easier to obtain. Often, all you have to do to get a business debit card is to open a business checking account.
• It’s accepted everywhere. Debit cards are accepted by merchants the same way credit cards are and can be used at all the same places. You do have the added step of entering your PIN at checkout stands, though.
• There’s no interest to pay. Debit cards don’t incur interest on purchases like credit cards do. Sure, you may get hit with overdraft fees if you purchase more than you have funds to cover, but there’s no interest compounding over the months and years. “People don’t realize how quickly interest rates compound when you use a credit card and carry a balance,” said Gillman. 
• There’s no room to overspend. A credit card may have a high limit, which means you could easily spend more than you have, which may get you into trouble. A debit card is linked to the cash you have in the bank, so your buying power diminishes as money comes out of your account. 

Cons of a business debit card

Although a debit card can help you avoid new debt, it can also harm you financially. Here’s how:

• It doesn’t build your credit score. Purchases you make with your debit card won’t be reported to the credit agencies like credit card transactions are. Since you’re using your own cash, there’s no need for the credit bureaus to track how you managed it, so there’s no direct way to boost your credit score with a debit card.
• It’s harder to protect. If your debit card is lost or stolen and a transaction is made with it, it’s not as easy to dispute the charge as with a credit card account. Money could have been stolen from your checking or savings account already, requiring additional steps to recover it. It typically takes banks 10 days to investigate and restore your account when there’s a fraudulent charge. That time lag could hurt your cash flow and, thus, your operations.
• Funds are limited. As mentioned above, there’s no wiggle room with a debit card — your limit is the money in your bank account, which makes it ineffective as an emergency backup. If unexpected expenses arise and you don’t have a business credit card, you may be forced to rely on alternative lending.

Should you use a business credit or debit card?

Knowing the differences between a business credit card and a business debit card is the first step in figuring out which payment method is right for your company. The second is considering your business’s financial goals and spending habits. 

Use a business credit card if:

• You want to build up business credit. Responsible use of a credit card helps establish and improve your business credit score, which helps you obtain better terms on future funding. 
• You need improved cash flow. A business credit card provides a buffer, allowing you to cover expenses even if your checking account doesn’t contain the funds. 
• You want to earn rewards on business purchases. Many business credit cards reward spending with points or cash back. Business owners who charge large amounts can quickly rack up a huge amount of perks. 
• You can comfortably pay your balance in full each month. You’ll want to avoid debt and interest charges by paying your total balance every billing cycle. 

Use a business debit card if:

• You prioritize responsible spending. A debit card encourages responsible spending habits because it deducts cash directly from your account balance, preventing you from going into debt.
• You value real-time expense tracking. Transactions are reflected immediately in your business bank account, giving you a clear picture of your spending and available budget.
• Your business is new. Debit cards are generally easier to obtain than credit cards, which require a more extensive credit history. 
• You want to avoid high fees. Business debit cards typically have lower fees compared to credit cards.

Ultimately, deciding between a business 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.”

Mike Berner contributed to this article. Source interviews were conducted for a previous version of this article.