Drawbacks of Using a Debit Card for Your Small Business
Not All Plastic Is Created Equal
When you opened your business checking account, you probably received a debit card linked to your account. Chances are you use it without a second thought. And why wouldn’t you?
Your business debit card offers a simple way to make purchases. It’s more convenient than checks, and you don’t accumulate debt when you use one.
However, there are drawbacks. Instead of using a business debit card for purchases, you may want to use a business credit card. Here’s why.
1. No Cash Flow Benefits
When you make purchases with your business debit card, you’ll immediately see a deduction for the purchase amount from your company’s linked bank account. In other words, those funds are coming from your cash flow.
Your business gets cash when your customers purchase your goods or services. Then you spend that cash on payroll, loan payments, taxes, etc. According to the Small Business Administration, cash flow problems are one of the main reasons businesses close. Managing your cash flow, then, is a crucial element to your entrepreneurial success.
Using a business credit card, rather than a business debit card, to pay expenses can help improve cash flow. If your credit card offers a grace period, you will have time to pay off that purchase without incurring interest charges. Having that additional time to pay for purchases—whether it’s a few days or a few weeks—can improve cash flow.
2. Limited Fraud Protection
A debit card that’s linked to a personal account offers fraud protection. However, the federal law that helps protect consumers in the case of debit card fraud does not apply to a business debit card. So, when you use your business debit card for purchases, you are relying on voluntary zero liability policies offered through your financial institution. Even if your card issuer agrees to reimburse you for fraudulent charges, it can take days or weeks for them to do so. In the meantime, you may not have access to the funds you need to pay other bills.
Business credit cards, on the other hand, are covered under federal law in the case of fraudulent use. You may want to consider a small business credit card for your purchases so that you have full fraud protection.
3. You Can’t Dispute a Purchase
Have you ever made a purchase online with your debit card and encountered a problem? It's not uncommon to receive the wrong item or to have a package get lost in the mail. If you encounter that type of problem and the merchant is unresponsive, you can dispute the purchase with your card issuer. But that’s only the case if you used a credit card, not a debit card.
When you dispute a credit card transaction, federal law requires your issuer to provisionally credit your account for the amount of the purchase and to make those funds available to you while they investigate the issue.
Your business debit card is different. There are no federal regulations that require card issuers to assist in resolving disputed business debit card purchases. The money will have been withdrawn from your account at the time of purchase, and you'll have to rely on the goodwill of the merchant to replace the item or issue a refund.
4. Few Rewards Available
A few debit cards offer rewards, but they simply aren’t as lucrative as the rewards you can earn with many small business credit cards. If your firm makes lots of purchases using plastic, you may be missing out on significant rewards.
When looking for the best business credit card, you can choose from a variety of different types of rewards. If you travel for business, for example, you may want to consider a card that offers points you can use toward airfare and hotels. And cash-back credit cards are always a popular choice. Consider using a business credit card for all the items you normally buy with your debit card to maximize your rewards then pay in full to avoid interest charges.
5. Debit Cards Don’t Build Business Credit
A good business credit profile can help your business obtain financing. But your business debit card won’t move you toward that goal. Issuers don’t report debit card transactions to the business credit bureaus.
If you haven’t built credit for your company yet, a business credit card is a vital step toward establishing a separate credit profile. It will increase the value of your firm, improve your ability to access financing and separate your business and personal finances. Most small business credit card issuers report account activity to at least one of the major business credit reporting agencies such as Dun & Bradstreet, Equifax, or Experian.
The bottom line is that by using a business credit card instead of a business debit card, you’ll enjoy fraud protection, help improve cash flow, and reap the benefits of myriad rewards that business credit cards offer.
SBA: "Why Do Businesses Close?" Accessed Oct. 22, 2020.
CFPB: "12 CFR Part 1005 (Regulation E): Comment for 1005.2 Definitions," Accessed Oct. 22, 2020.
CFPB: "12 CFR Part 1026 (Regulation Z): Liability of Cardholder for Unauthorized Use," Accessed Oct. 22, 2020.
FDIC. "Consumer Protection Topics - Billing Errors and Resolution," Accessed Oct. 22, 2020.