Afew weeks ago, we went to open a bank account for a small business. We were asked whether we wanted a debit card or a credit card for our business during the process. While I’d like to think I already had an answer for that, I still weighed our options.
Payment methods are big decisions for businesses. The method you choose can have a significant impact on business finances. Therefore, ensure you make a wise choice.
Which card should you choose? And why? Well, let’s look at the benefits and drawbacks associated with each type of card.
Debit cards are simply cards that give you access to the money in a bank account. Without them, you would have to go to your bank to withdraw physical cash to make payments. Debit cards allow you to settle transactions with your bank balance without entering the banking hall.
These are the popular types of debit cards:
1. Prepaid debit cards
To use a prepaid card, you have to fund it. When you exhaust the money allocated to the card, you will need to reload it to use it again.
Prepaid cards help you set spending limits for employees.
If a prepaid card ever gets into the hands of a criminal, they can only steal the amount allocated to the card. The rest of the funds in the business bank account will be out of reach.
2. Standard debit cards
They are regular debit cards that give access to the funds within the bank account. They work like personal debit cards. However, unlike credit cards that you swipe (not all credit cards have a PIN), debit cards require the use of a PIN. With this, you enjoy more security.
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Benefits of debit cards
1. No interests
When you pay with a debit card, you use business funds to settle business expenses. Banks cannot charge interest on that. Interest payments can be significant when they pile up. Debit cards help your business avoid that financial burden.
2. Avoiding excessive debts
Excessive debts can cripple a business. Debits cards help you avoid the burden of debts by limiting payments to the cash owned.
A prepaid card will limit payments to the amount of money released to it. This limit can help you control expenses and also help you avoid going over the budget.
3. Fewer fees
Some banks do not charge you fees when you make payments with your cash. Some debit cards charge fees, but these amounts are often minimal.
Drawbacks of debit cards
1. Poor security
If a thief gains access to your business debit card and the PIN, they can steal all your money. Since the money belongs to your business, your business may bear the losses alone.
2. No credit score
A debit card does not give you access to credit. As a result, using one will not improve your credit score. However, building up your business credit score can be beneficial if you have expansion plans that involve borrowing.
Credit cards are portable lenders. They allow you to borrow to make payments for expenses and purchases. In exchange, you repay the amount borrowed together with fees and interest. As a result, they. Thus, they can save you a lot of embarrassment when you are cash-strapped.
Some businesses even use multiple credit cards for different types of purchases. In addition, card companies offer different kinds of rewards for your patronage.
Consider your business needs and your lifestyle when you choose a credit card.
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The major types are:
1. Standard credit cards
This type of card offers your business a simple line of credit without any promise of rewards. There are no perks to using this type of credit card.
2. High reward business cards
Some credit card companies emphasize cash backs and other rewards like airline points. If you are interested in such perks, conduct your research and choose a card that fits your needs.
3. Secured credit card
Credit cards are a serious responsibility. If you are scared of debt, a secured credit card is your best option. A cash deposit guarantees your debt, and you can make payments till the limit of the cash balance.
This option allows you to build a good credit score without the risk of sinking into debt. Companies that obtain credit cards only to improve their credit score prefer this.
Benefits of using credit cards
1. Building credit score
In many countries, credit scores measure creditworthiness. As a small business owner, good business scores can qualify your company for larger loans in the future. Good credit scores can also help you negotiate for better interest rates. Using a credit card for payment is an excellent way to build good credit scores.
Credit cards are considerably safer. If you report any anomaly in good time, your business may not have to bear the loss. The credit card company would make it a priority to retrieve the money.
Drawbacks of credit cards
1. Accumulation of debts
When left unpaid, debts and interests can accumulate and become a problem for a business. Large debts can ruin your credit score.
Using credit requires a lot of care and diligence. A budget can help you become more financially responsible.
2. High interests
When you pay off the minimum amount due in a month, you still have to deal with interest on the remaining credit balance, which can be high.
In some businesses, employees make payments and purchases for the organization. In such cases, consider the ability and the integrity of the employee.
Some business owners choose one payment method, while other business owners combine both debit and credit cards.
There is no perfect choice when it comes to debit cards vs credit cards for your small business. Carefully examine your situation and select the best option for your business. Contact a financial adviser if you need further assistance.