Making purchases with plastic cards is a convenient and flexible option for many businesses.
The different types of card available – from debit, credit and charge cards to specialist purchasing cards – mean small-business owners don’t have to carry large amounts of cash or a company chequebook. Staff purchases can also be effectively managed through the use of company payment cards.
Cards are widely accepted around the world and can help you keep close track of your expenditure. But with such a wide variety of cards on the market it can be hard to decide which is best for you.
This guide sets out the advantages and disadvantages of using company or corporate payment cards and gives advice on how to choose the right card for your business.
Table of Contents
Types of card available
There’s a wide range of plastic payment cards on the market, offering an array of different terms and conditions and ways to pay off your balance.
Credit cards:
- allow purchases up to a specified limit
- offer an interest-free period
- allow a minimum repayment each month, but charge interest on the balance
- incur no interest if the bill is paid in full by the specified date
- can be issued to employees, with an approved spending limit
There are numerous credit card providers – most are Visa or MasterCards issued through a bank or building society.
You can:
- read about Visa credit cards on the Visa website – Opens in a new window
- find out about MasterCard credit cards on the MasterCard website – Opens in a new window
Charge cards:
- allow a period of credit – but must be paid off in full each month
- can be issued to employees
- allow you to set spending limits
- may charge an annual fee
Debit cards:
- are issued in conjunction with a business current account
- might be cheaper than cheques
- can only be used by signatories
- may offer a greater degree of control – you can only spend what’s in your account
- have less flexibility than other cards
Pre-paid cards:
- enable businesses to manage and monitor spending
- can be provided pre-loaded to employees to pay expenses
- are available in different currencies as an alternative to travel cards
- usually come with fees and charges – such as issuing costs, management fees, and transaction or ATM withdrawal fees
Travel cards:
- offer a convenient way of paying business travel expenses when travelling
- operate in the same way as other business credit or charge cards
- offer additional benefits, such as travel insurance or currency facilities
Purchasing cards:
- are generally restricted to big businesses or public-sector bodies
- are issued by banks and companies such as Barclaycard and American Express
- cut down on paperwork and the need for purchase orders
You could use a personal debit or credit card instead of a business card for business expenses, eg while you wait for your business bank account to be set up. However this means you will be mixing personal debts with business debts.
It also makes it more difficult to track business expenditure. See the page in this guide on the risks of financing a business with a personal credit card.
Business benefits of debit and credit cards
Using company credit or debit cards to make purchases offers a number of key business benefits:
- Convenience – cards are quicker and might be cheaper to use than cheques. They’re useful for everyday expenses and can be used over the phone and internet.
- Credit – credit or charge card bills can offer an interest-free period of up to 56 days, dependent on which card issuer you use.
- Most cards are globally recognised – using cards for foreign travel purchases may give you better exchange rates. It also reduces the need to change cash before travelling.
- Ability to monitor expenditure – you can specify which employees receive cards and set different credit limits for each card.
- Fast access to cash – cash can be withdrawn from cash machines. However, card issuers may levy a commission and interest is payable from the day the cash is withdrawn.
- Reduction in administration – with a company credit or charge card, you pay one bill each month, no matter how many purchases you make. Itemised monthly statements can help with your accounting and administrative procedures and make it easy to distinguish business from personal expenses. Your provider may also be able to supply a report of your annual expenditure and a breakdown of the VAT charged on purchases.
Some of these benefits can also be achieved by using a personal credit or debit card. However, there are a number of pitfalls that you should be aware of. See the page in this guide on the risks of financing a business with a personal credit card.
Contactless payment technology is being added to UK payment cards. Contactless cards utilise the security built into chip and PIN cards and can be used for low value transactions of £15 or less. Customers hold their contactless card up to a secure reader to make their payment – without needing to enter a PIN.
Find information on contactless technology on the Contactless website – Opens in a new window.
Drawbacks of debit and credit cards
Using business credit or debit cards to make payments can bring a range of benefits, but you should also be aware of the disadvantages.
Even though you can usually set maximum spending limits on employees’ cards, you should be aware that you’re giving your employees the opportunity to spend company money unchecked. There’s the risk they could purchase unsuitable or unnecessary items which can’t be returned.
At the very least, it’s a good idea to combine card use with a normal reporting system to minimise the risk of unnecessary transactions. But it may be worth looking for cards that allow you to place restrictions on the purchase of certain things such as petrol, as your business has to honour every payment made by employees using the cards, regardless of whether you authorise it or not.
With any personal credit or debit card, you are also open to the possibility of two further major drawbacks.
- Card fraud – if the card details are discovered or revealed, you may find many purchases worth thousands of pounds wrongly appearing on your statement. Even if this is due to an employee’s negligence, your business will still be liable for the payments. In addition to the potential financial loss, such situations can be time-consuming to resolve. You can get tips on preventing card fraud on the Financial Fraud Action website – Opens in a new window.
- Debt – with the convenience of a plastic card and the time lapse between purchase and payment, it can be tempting to overextend yourself and build up debts for the business.
Remember, too, if you make purchases with a credit card and don’t pay off the bill in full, you’ll incur interest charges, which can easily mount up.
Choosing a card provider
When you have decided which type of business payment card you’re looking for, how do you choose the right card provider?
Debit card choices are the most straightforward. Your business bank account is most likely to offer a debit card free as part of the package.
However, for other types of card it’s worth considering a range of providers as well as your own bank.
Business charge cards are offered by most business banks and companies such as Barclaycard, American Express and Diners Club. It’s worth examining the different deals available and considering a number of key points:
- Is there an annual fee? If so, how much and is it payable for each cardholder?
- Can you give individual cards to chosen employees?
- What are the minimum and maximum spending limits?
- What are the penalties for late payment of your bill?
- Are there any added perks or benefits – perhaps Air Miles or hotel discounts – that would be useful to your business?
The same considerations generally apply if you’re choosing a credit card for your business. But here it’s essential to compare the interest rate – usually expressed as the APR (annual percentage rate) – of different deals. The length of any interest-free period is also an important consideration. You can compare business credit card deals on the Motley Fool website – Opens in a new window.
Whichever type of card you are looking for, it is advisable to shop around and negotiate. Interest rates, charges, interest-free periods and benefits can vary significantly. Your bank account provider may be prepared to amend its terms if you can demonstrate that another provider offers a better deal.
To find out about the deals on offer, go into local bank branches or visit the websites of banks with small-business accounts. Compare business bank accounts on the Moneyfacts website – Opens in a new window.
Risks of financing a business with a personal credit card
Personal credit cards can be relatively easy to obtain and convenient to use. And with a range of cheap deals offering introductory interest-free credit periods, it can be tempting to use them as a supplementary form of finance for your business.
However, if you use a personal credit card to fund the business you’re running and your business is a limited company, there is a significant risk that you, rather than the company, will be held personally liable for any debts.
In addition, it doesn’t make financial sense to fund your business using a personal credit card, particularly on an ongoing basis. Although initial rates of interest may be attractive, in the long term credit card rates are generally much higher than for other forms of business borrowing. It is also notoriously easy to end up accumulating business debt on personal credit cards.
Using a personal card to pay for business purchases also makes it more difficult to keep personal and business expenses separate. This then makes it harder to monitor and account for business expenditure.
A business payment card, bank loan or overdraft will offer much better interest rates and can be matched to the business’ requirements. For more information, see our guide on bank finance.
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Every effort has been made by the author(s) to ensure this article’s accuracy but it does not constitute legal advice tailored to your circumstances. If you act on it, you acknowledge that you do so at your own risk. We cannot assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.
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