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Business Debit Card vs. Credit Card: What’s Right for Your Small Business?

These are some pros and cons of using a business debit card versus a credit card when starting a small business.
Deborah Findling, Editor, Finance
Square

This article is only for educational purposes and does not constitute legal or financial advice. Make sure you consult a professional regarding your unique business needs.

Choosing between a debit card, credit card (or both) can be an important decision in setting up your small business. You’ve done the hard part and started a business, congrats! The idea has blossomed into a product or service, and you’re ready to take the next step by investing in a debit or credit card. With so many options available, which is the right one?

What is a debit card? Some pros and cons.

Pros:

  • When making a purchase, the money will be drawn directly from your account (and you can only spend available funds)

  • No interest charges 

  • No credit requirements

Cons:

  • Common fees: monthly, overdraft, ATM, minimum account balance fees, and foreign transaction**

  • If fraud occurs, you are at risk for more liability than a credit card

A debit card is a payment card that deducts money directly from a checking account to pay for purchases. The card works most similarly to cash, you cannot spend more than you have in your account which is appealing for those businesses who worry about debt. While some banks monitor your debit card for suspicious activity, you could still be open to some risk if the card is lost or stolen. There is a 60-day window from receiving your bank statement where you can report the loss to mitigate any liability for the unauthorized spending.

For business owners specifically, here are some factors that might factor into their consideration of using a debit card.They are also easier to qualify for — receiving approval for a debit card is easier and more expedited as the process does not require a credit check. This feature makes it easier for business owners to keep business expenses separate from personal. 

If you want to explore acquiring a business debit card, Square Card has no minimum balance fees, no annual fees, no monthly fees, no overdraft fees, or any other recurring fees. Your Square Card is linked directly to your Square Balance, so you can instantly access the funds (no more waiting on bank transfers or paying for instant transfers) and see all of your sales and transaction information in one place, making it easier to control and manage your cash flow. 

The approval process is expedited with no credit score required, no credit check, and a two-minute ordering process.

The takeaway: Think of your debit card as a check but faster. When you make a purchase it will come directly out of your account.

Fees are subject to change depending on bank or provider on service, minimum balance, overdraft, minimum initial transfer, and account service fees.

What is a credit card? Some pros and cons.

Pros:

  • Purchase something now, pay it back later 

  • Limited liability for fraud

Cons:

  • A credit score will be used to assess your qualification and approval

  • Interest on balances

  • Fees: annual, late payment, foreign transaction, balance transfer, cash advance

A credit card lets cardholders borrow funds to pay for goods and services. Essentially, a credit card allows you to borrow money and pay it back on a monthly cycle with no interest, or defer a payment for an interest rate and any agreed-upon additional charges. Credit cards also offer fraud protection services as well as other benefits and incentives.

There are several types of credit cards:

Type of Credit Cards How It Works
Reward Credit Cards From travel to cash rewards, cardholders receive rewards for spending money on specific types of goods and services, such as airlines.
Secured Credit Cards This card requires your credit limit to be equal to your security deposit
Business Credit Cards You must be the owner or principal of the business and provide a Tax ID or Employer ID along with your Social Security number to acquire this card.

Credit cards offer some degree of fraud protection, but this varies depending on the card provider or product offering. 

The takeaway: A credit card issuer or bank extends you a line of credit that you repay.There is a credit limit which represents the amount you can spend. You’re required to cover the minimum payment by the due date and pay interest on whatever amount remains.

Whether you choose to go with a credit card or a debit card, consider the risks associated with each. Debit cards only allow you to spend as much as you have available, exposing you to fewer risks. Credit cards allow you to pay for something now and pay it back later, giving you greater rewards for travel or food, but there are some risks if you do not settle your account within the designated time.

Deborah is an editor at Square, where she writes about investment, finance, accounting and other existing and emerging payment methods and technologies.