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Credit, Debit, or Spend: Which Card is Right for Your Small Business?

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When it comes to paying for business expenses, the small business owner has no shortage of choices. It should go without saying that you need a business bank account, but beyond that, you’ll need to be strategic about managing expenses. The type of payment card you should use could be more impactful to your business than you realize. In this blog post, we’ll cover credit cards, debit cards, and spend cards (and how you might use them).

Credit, Debit, or Spend: Why Does it Matter?

You can pay your regular business expenses with any combination of the three, but you should know that each has its pros and cons.

There are also situations where a specific choice will be most beneficial to your business.

Do you need to borrow money to pay for the expense? Are you trying to build your credit score? Or are you simply looking for convenience? These are all important factors to consider when deciding which type of card to use. 

Credit Cards

The first thing to know is that a credit card is a loan. Whenever you use a credit card, you are effectively loaning money from the financial institution which issued you the card. You will then have to pay back that money, plus interest and fees. This can be a great way to finance your small business, but it is important to be aware of the potential risks.

If you use your credit card responsibly and make your payments on time and in full, you could see your credit score improve. This can be a great way to get access to better financing options in the future. However, if you miss payments or max out your credit limit, your credit score will suffer.

Another benefit of using a credit card is that you have the flexibility to pay for things over time. If you can’t afford to pay for something all at once, you can use your credit card to finance it and make monthly payments. However, this also means that you will end up paying more for the purchase in the long run because of interest and fees.

Debit Cards

A debit card is a great way to pay for purchases without having to carry cash around. When you use a debit card, the bank immediately takes the money out of your account. It is a convenient method of paying for business expenses, especially when it comes to ad hoc purchases.

A debit card is the perfect way to help you organize your finances as it does not allow you to spend more money than exists in your account, which helps you avoid debt. Your peace of mind also comes at a low cost, as most banks offer fraud protection while keeping all transactions inside their network secure.

However, there are a few drawbacks to using a debit card. Most traditional debit cards do not build your credit. Transactions are not reported to credit bureaus, which can impede your long term goals as a business. When it comes to controlling your spending, a traditional debit card keeps you within the constraints of the money in your account, but it does not necessarily keep you within your budget (much like your personal debit card). There’s also the risk of losing the card or having it stolen, which can give someone access to your account until the card is locked or canceled.

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Spend Cards / Prepaid Debit Cards

Spend cards are growing in popularity. A spend card is a type of prepaid debit card that can be used to make purchases or withdraw cash. No matter how much money you load it with, this is a guaranteed way to help you avoid overspending and stay within budget. Spend cards also typically have fraud protection, so that you can feel secure knowing that your money is, too.

Your spend card can also help you build your credit score. . Some banks will report transactions on this card to credit bureaus, and they are always “paid off” on time since the money comes directly from your account. If you choose the right spend card, it will improve your credit score. When a good credit score reflects properly through your business credit report, it can be a great way to get access to better financing options in the future.

There are a few risks to consider with spend cards. If it’s stolen, you’ll need to cancel, replace it, and get any fraudulent charges taken care of (much like a debit card). Additionally, spend cards might have monthly fees, so research appropriately.

Which type of card is right for you? It depends on your individual needs and preferences. If you’re looking for ways to manage expenses against your budget, limited spend cards or prepaid debit cards can be very effective. If you need to spend money that you don’t yet have, the credit card is your only option of the three—but be mindful of payment deadlines, fees, and interest rates.

For more information on budgeting and gaining control of small business expenses, check out our guide: How to Write a Budget for Your Small Business.