Business Credit Card vs Debit Card

The fundamental difference in risk

When you use a business debit card, you are spending your own money. If there is no money in the account, the transaction declines. There is zero risk of accumulating debt, and zero interest to pay. It is the safest way to spend and keeps your financial exposure minimal, shielding you from accumulating liabilities.

When you use a business credit card, you are spending the bank's money. This offers the flexibility of deferring payments, but it can also lead to financial strain if not managed properly. If you cannot pay it back at the end of the month, you begin accumulating debt at a high interest rate. The risk is entirely on you, usually backed by a personal guarantee. This can affect your personal finances if your business struggles to cover its debts.

It's crucial to evaluate both your business’s financial discipline and personal risk tolerance when considering a credit card. While they offer potential benefits, they’re not without their pitfalls, especially if spending goes unchecked or unforeseen business downturns occur.

The cash flow advantage of credit

The main reason businesses use credit cards is cash flow smoothing. Using a credit card can significantly aid in balancing the timing of your inflows and outflows. If you buy £2,000 of materials on a debit card, that cash leaves your business instantly. Consequently, this can strain your cash reserves if immediate income isn't also due.

If you purchase the same materials on a credit card, the card's stated interest-free period can defer the cash outflow when you pay the statement in full. For example, Capital on Tap currently states up to 42 days on card purchases, subject to its statement cycle and payment terms. Check the specific product terms rather than assuming every card has the same period.

This timing advantage can be a lifeline for managing short-term liquidity in a growing business. It allows for strategic cash allocation without disrupting operational efficiencies, which is particularly beneficial when invoicing cycles are longer or clients delay payments.

Rewards and bookkeeping

Credit cards frequently offer cashback (e.g., 1% on all spend) or travel rewards, which debit cards rarely do. If you spend £5,000 a month on Facebook ads, putting it on a 1% cashback credit card earns you £600 a year for doing nothing differently. These rewards can accumulate to offset business expenses significantly over time.

Furthermore, putting all subscriptions and travel on a credit card keeps your main current account clean, making bank reconciliation much faster. It centralizes small, repeated transactions and provides an easy tracking mechanism for these expenditures.

Utilizing separate cards for varying transaction categories not only improves your accounting efficiency but also helps in enforcing better financial controls. It allows clear audit trails, decreasing the likelihood of mismanagement and simplifying the bookkeeping process for your financial team.

• Cashback on eligible purchases
• Points or miles for future trips
• Discounts on business-related purchases
• Automatic categorization of expenses

What to do, in order

1. 1

   Assess your discipline

   If you have ever missed a personal credit card payment, stick to a business debit card until your systems improve. Consistent adherence to credit repayment schedules is paramount when juggling multiple expenses.

2. 2

   Map your spend

   Look at your largest expenses. Can they be paid by card? (Many suppliers only accept BACS transfers, making a credit card useless for those costs). Understanding what can be strategically paid by card helps in deciding the card type to choose.

3. 3

   Calculate the potential rewards

   Multiply your monthly card spend by 1% to see if the cashback is actually worth the administrative effort of a second account. Consider the cumulative benefits over a year to truly gauge potential gains against the hassle of managing extra accounts.