One of the primary tasks of every small business owner is overseeing the details of money, including budgeting, managing cash flow, and controlling access to it. It's easy to do most of that with a business credit card, but is that the best choice? Not always.
Cards—debit or credit—can be used for almost everything today, and are accepted almost everywhere in our increasingly cashless society. But there may be benefits to using one over the other. Here are the pros and cons to using a small business debit card, including when it's a better choice than credit.
Advantages of Using a Business Debit Card
Keeps You on Budget
Because you're drawing funds from your account balance, you can only spend money you have. To avoid embarrassment at checkout, you'll have to know your balance and what amounts are pending. Using a debit card forces you to stay on top of your business finances.
No Interest and Lower Fees
Two things that can really chew up a small business budget are credit card fees and interest. With a bank debit card, you can draw cash from a networked ATM or from an ATM at your own bank, if necessary, and save money on these fees. Since you’re not borrowing money from a card issuer, you won't pay any interest charges. There’s often no annual fee to use the card either (though there may be a maintenance fee for the checking account that it’s connected to).
If you're really serious about sticking to your budget, you can opt out of overdraft protection. You won't be able to make purchases if there’s no money in your account, and overdraft fees are less likely (but still possible when charges are pending). Vigilance can help you save on overdraft fees if you go over. You often have a day or so to deposit money before you are charged, as long as transactions are pending.
Debit Card Security
Banks and credit unions have become more vigilant with security. When something unusual occurs—say a large purchase or one occurring in a state other than where you live—some banks may put a temporary hold on your card and flag purchases until you respond. Some banks may allow you to turn your card off immediately if you lose it, and turn it back on if you find it on the floor of your car.
Chip-card technology such as EMV has made debit cards less vulnerable to point-of-sale fraud by encrypting transactions.
Laws have expanded to offer more consumer protection for debit card users. Like credit card companies, banks have responsibilities by federal law to protect your account, but you must act quickly. According to the Electronic Funds Transfer Act (EFTA), you are not responsible for any unauthorized transactions if you report a consumer debit card missing before someone uses it. If someone uses your consumer debit card before you report it lost or stolen, your liability depends on how quickly you report the loss.
However, it's important to note that these protections are in place for consumer debit cards, and may not be offered on business cards and accounts. Check with your bank or credit union to understand how your business debit card and account are protected in the event of fraud.
|If you report your card lost or stolen:||Your maximum loss is:|
|Before any unauthorized charges are made||$0|
|Within two business days after you learn about the loss or theft||$50|
|More than two business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you||$500|
|More than 60 calendar days after your statement is sent to you||All the money that was taken from your account, and possibly more if you have other accounts linked to your debit account|
Debit Cards Are Easy to Get
Business credit cards often require a good credit score, decent credit history, proof of business income, and a lot more paperwork. Getting a debit card issued for an existing bank account can be pretty simple.
While debit cards have several advantages and are easy to use, it’s important to also be aware of the disadvantages that come with them.
Disadvantages of Using a Business Debit Card
Checking Your Account Frequently and Tracking All Charges
If you don't record every purchase, you might not spot an unauthorized one until it's too late. The upside of this need for caution is that it's easy to see where your business might be wasting money. Being hyper aware of your charges is both a pro and a con.
Protections Aren’t As Strong
The Fair Credit Billing Act (FCBA) offers a great deal of additional protection for consumer credit card holders, and your maximum liability is $50 for a lost or stolen credit card. Protections extend to billing errors, quality of goods and services, failure to post payments in a timely manner, and more. Debit cards don’t come with all of that security and also tend to offer less protection for businesses, as well as for returns, overbilling, and other typical transaction issues.
It Won't Help Build Your Credit
Unlike when using credit cards, you won't build your business’s credit score using a debit card. On the other hand, paying with a debit card won't hurt your credit either.
You Can’t Use a Debit Card as a Loan Source
Some businesses rely on short-term borrowing with credit cards to fund their businesses. You can’t do that with a debit card. You can only use the money you have access to in your account.
Protecting Your Business Debit Card
Given the alarming number of incidents of data breaches and identity theft over the years, it may be wise to take a few precautions, such as the ones listed below, to make sure your business debit card remains safe.
- Track your purchases against your bank transactions frequently. Report any suspicious activity to your bank immediately.
- Only use ATMs at your bank branches. Places like gas stations and stores are most vulnerable to “skimming,” or theft of account numbers.
- Report missing cards to your bank immediately. At a minimum, turn your card off temporarily to give you time to search without risk.
- Change your PIN and online password often.
Never use public Wi-Fi to check bank accounts or make purchases. If you're connected to a public network, hackers may be able to see your transactions.
When You Should Use a Business Debit Card
If you are detail-oriented, want to avoid credit card debt, and need to stick to a budget, a business debit card is a good solution. Using one won't help you build your credit, but it can help you stay within your budget by avoiding interest or annual fees and potentially high monthly payments. You may make better decisions with a debit card because only using money you have may force you to fully evaluate each purchase—and that can be good for business.