Debit and credit cards

2. Types of cards

There's a wide range of plastic payment cards on the market, offering 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.

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 along with a business current account
• might be cheaper than cheques
• 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

• can help you 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 what you spend on your business.

3. Pros and cons

Pros

• 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
• ability to monitor spending - 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
• reduction in administration - with a company credit or charge card, you pay one bill each month, no matter how many purchases you make

Cons

• 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 may still be liable for the payments.
• 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.

4. Common mistakes

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 a risk they could purchase unsuitable or unnecessary items which can't be returned.

You should 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.

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.

5. Funding sources

There are a number of credit card providers – most are Visa or MasterCards  issued through a bank or building society.

To find out about the deals on offer, go into local bank branches or visit the websites of banks with small-business accounts.

Use our Finance Locator to search for business bank accounts.