But the array of cards available can be bewildering, and therefore challenging for an SME to decide which card to use for what purpose. This article explores the pros and cons of three types of business card—credit, debit, and charge—and how they can be deployed to meet business needs.
Pros and Cons of Small Business Credit Cards
Like a personal card, a business credit card is a line of credit that can be drawn upon at any time, up to a pre-set limit. It can be used for single large purchases (within the limit) or for multiple smaller purchases. Business credit cards can be a convenient way for an SME to smooth out short-term cash-flow fluctuations.1
Typically, there is an interest-free period on each transaction, after which interest is charged on the unpaid amount. But it’s not always that simple; business credit card charges can get complex: there may be a yearly fee, and there can be transaction fees and other ad-hoc fees as specified in the card terms and conditions. Purchases in a foreign currency may incur fees and foreign exchange commissions.
Many business credit cards have rewards programs. Rewards programs vary considerably, but typically they give points per transaction which can be aggregated and used to pay for goods and services as specified in the rewards program documentation.2 Some business credit cards have cash back schemes, which give back to the cardholder a percentage of the purchases on the card—effectively giving the cardholder a discount on purchases made with the card.3
Business credit card providers typically check credit scores both for the business and its owner/manager, and both the credit limit and the interest rate may depend on those scores. Interest rates can be lower on secured cards, where the business lodges cash or assets with the card provider as security against the credit line.
Business Charge Cards
Business charge cards act like short-term interest-free loans. There is a charging period, typically a month, at the end of which the balance on the card must be paid in full. Interest is not charged provided payment is made on time, but late payments may incur substantial fees. Some charge cards allow part of the balance to be paid off over a more extended period of time: these cards typically charge interest on the balance remaining after the end of the charge period. Charge card providers usually charge an annual fee, which can be substantial.
One advantage of a charge card is that the credit limit can be significantly higher than on a credit card. Some cards don’t have a limit at all. Thus, a charge card can be used to make one-off large purchases, enabling the business to benefit from an interest-free period which is typically not available on a business loan.4
Charge cards also typically have rewards programs, which can be generous. However, rewards programs vary considerably: SME owners and managers may wish to review a range of business charge cards to help them decide which rewards program is best suited to their needs.
As with business credit cards, charge cards are subject to credit scoring, which may be applied to the business owner as well as to the business itself. Typically, a good-to-excellent credit score is needed.
Business Debit Cards
Debit cards are completely different from business credit and charge cards. They are not credit instruments. They are issued by banks and linked to a checking account. Payments made using the card are debited from that checking account.5
Business debit cards can be a convenient and inexpensive way of making business purchases. Transaction fees can be lower for debit cards than credit cards, and interest is only charged if the associated checking account goes into overdraft as a result of the transaction. Debit cards can be used for foreign currency transactions, though the issuing bank will determine the exchange rate and may charge fees and commission. Debit cards do not usually have annual fees.6
Because they are not credit instruments, there are no credit score checks for debit cards.
