You probably received a debit account when you opened a business checking account. You probably use it every day without thinking twice. Why wouldn’t you use it?
You can make simple purchases with your business debit card. You can use it instead of checks and avoid accumulating debt.
There are some drawbacks. You may prefer to use a credit card instead of a debit card when making purchases. Here’s why.
1. No Cash Flow Benefits
You’ll see an immediate deduction from the linked account when you use your business debit card. These funds come from your Cash Flow.
When your customers buy your products or services, you get cash. You spend the cash you receive on payroll, loans, taxes, etc. Cash flow problems are a major reason for businesses to close, according to the Small Business Administration. 1
Note:
You can improve your cash flow by using a credit card for business expenses rather than a debit card. You can pay for the purchase using your credit card if it offers a grace-period. The extra time you have to pay for your purchases, whether it is a few days or several weeks, can improve your cash flow.
2. Limited Fraud Protection
A linked debit card to a personal bank account provides fraud protection. The federal law protecting consumers from debit card fraud is not applicable to business debit cards. 2 When you use a business card, you rely on the voluntary zero liability policies provided by your financial institution. Even if the card issuer is willing to reimburse you, it may take several days or even weeks. You may not be able to pay your other bills until you receive the money.
If you want full fraud protection, it is worth considering a business credit card.
3. You Can’t Dispute a Purchase
You may have encountered problems when you made an online purchase with your debit card. It is not unusual to receive the incorrect item or have a package go missing in the mail. You can dispute the transaction with your credit card company if you have this type of issue and the merchant refuses to respond. This is only true if you paid with a credit card and not a debit one.
When you dispute an issue with a credit card, federal law requires that your issuer credit your account and make the funds available for you to use while they investigate. 4
Your business debit card will be different. Federal regulations do not require card issuers assist with resolving disputes involving business debit cards. You will need to rely upon the goodwill and generosity of the merchant in order to get a replacement or refund.
4. There are Few Rewards Available
Some debit cards do offer rewards but they are not as generous as rewards that you can earn from many credit cards for small businesses. You may be missing out if your company makes a lot of purchases with plastic.
You can select from different rewards when you are looking for the best credit card for business. You may consider a credit card that allows you to use points towards airfare or hotels if you are traveling for business. Cash-back credit cards have always been popular. Use a business card for items that you would normally purchase with your debit card. Pay in full and avoid interest charges by using the card.
5. Debit cards don’t build business credit
Your business can get financing with a good credit rating. Your business debit card will not help you achieve this goal. Debit card issuers do not report transactions to business credit bureaus.
A business credit card can be a great way to establish a separate profile for your business if you don’t have any credit history. This will improve the value of your company, increase your access to financing and help you separate your personal and business finances. Most small business card issuers will report account activity to one or more of the major credit reporting agencies, such as Dun & Bradstreet Equifax and Experian.
Bottom line, by using a credit card for your business instead of a debit card you will enjoy fraud protection and improve your cash flow. You’ll also reap the rewards of business credit cards.
