Debit card vs. credit card: Which solution is the best for your business?

It’s just a small piece of plastic (and in some solutions not even that, keyword: virtual cards) – and yet it’s hard to even imagine everyday life without payment cards. After all, they enable both flexibility and quick action that would be hard to replicate with cash and purchase on account. This is true both in retail and online. Especially in business, the ability to pay by card is essential for smooth operations without a lot of time-consuming back and forth.

You can choose freely between debit cards and credit cards for your company, even prepaid cards if required – and thus create more independence for yourself and your employees:

The ostensible benefit of debit cards and credit cards remains the same. You can make cash-free purchases promptly without having to pay in advance or purchase on account. However, the so-called flow of funds differs from debit cards to credit cards and can be an important decision criteria for which type of payment cards to choose. As a finance officer, you may be asking yourself this very question right now: which card is the best fit for my business?

The difference between debit cards vs. credit cards

At first glance, debit cards (often also referred to as Girocards or EC cards by consumers in Germany) and credit cards do not look very different. Especially in other countries, debit cards also have the embossed card number typical for credit cards and can thus only be distinguished by the word “Debit” printed in small letters. For the cardholder, however, there are significant differences when it comes to the flow of funds, i.e., when the amount is debited:

While with a debit card, payment is made directly without delay via the associated account, with a credit card you have days to weeks between payment (i.e., in this case, taking out a loan with the banking institution that issues the card) and settlement of this respective loan. The usual billing period for a credit card is monthly, then the amount is either collected directly from the linked account or must be transferred.

So which payment card is right for your business?

This speaks in favor of a debit card:

If your answer to these questions is a resounding “yes,” then debit cards make sense for your business:

• Do you prefer to pay directly, but have full control over your costs?
• Do you want to have an overview of your expenses at all times?
• You don’t want to take any risks and always stay within your budget?
• You want to start paying directly via debit card and don’t have time for or feel like going through a lengthy credit registration process?

This speaks in favor of a credit card:

Same game – if you’re considering a credit card solution within your organization, these questions can help you decide:

• Do you want to take advantage of the timely disconnect between payment and settlement to optimize your cash flow?
• Depending on the credit card and provider, you may have to pay interest. For you, the interest that may accrue on transactions or loans that are not settled on time is an integral part of your business plan and not a bad surprise?
• Do you expect your cash inflow only at a later point in time and therefore also want to push back the expenses?
• Do you have the time to wait for your worthiness of credit to be checked before you want to establish card payments in your business?

A credit card solution can make sense if your company has a lot of expenses, but your cash inflow is likely to be delayed. This could be the case, for example, with manufacturing companies that have expenses well before they can sell their product. Additional expenses can then be made via a credit card to relieve the current budget – but this strategy offers the risk of a cash shortage down the line. Thus, opting for a credit card solution at first offers freedom, as it allows you to push back the timing of cash outflow and temporarily increase your liquid assets. However, this time delay also entails a certain risk. So you should keep a close eye on your liquidity planning at all times.

What are the advantages of a debit card over a credit card?

When considering these financial pitfalls of a credit card, debit cards appear to be a “safe” solution at first. The debt risk is reduced with a debit card and the requirements for the cardholder are lower than with a credit card. Start-ups in particular have no other options at all going into business. Rarely are they already classified as creditworthy and therefore cannot apply for credit cards at all.

By the way, companies have to go through the so-called KYB (Know Your Business) process for both debit cards and credit cards. The KYB process is a legally required measure to prevent money laundering and fraud. The KYB process is a legal requirement to prevent money laundering and fraud, and requires a business owner to answer questions about his or her company, including information about the type of industry, business, shareholders and financials.

What are the disadvantages of debit cards?

The biggest disadvantage of a debit card compared to a credit card is the immediacy of the payment. Therefore, the account must always have sufficient funds. So if you’re a company that likes to have more timely scope between purchases and payments, you’d probably be better off with a credit card. Moreover, the data on a credit card is often in demand, especially for online purchases. Payment by debit card is not possible online as long as it is not issued via Visa or Mastercard – alternatively, there are the options of prepayment or purchase on account (or an online payment service such as Paypal), so the account is already charged when the purchase is made.

Interesting input: This is how credit card institutions such as Visa and Mastercard earn money from transactions via their cards

Debit cards and credit cards as part of a holistic financial operating system

No matter which card model you choose within your organization (perhaps it will be a hybrid), the full potential of both business debit cards and credit cards can only be realized if you can monitor your spending directly. For example, because transactions via payment cards are immediately linked to a budget and a framework for expenditures can be set. Virtual cards can also be created in a financial operating system – so every employee who is assigned a virtual (possibly one-time) card can make purchases independently and in real time. And all without the need to issue numerous plastic cards or pass around the single corporate credit card (this also simplifies subsequent accounting – no more cryptic statements with no clear ownership of expenses!).

A holistic financial operations system also forecasts anticipated expenses by accounting for payments made via credit cards and mapping them as part of the cash outflow. With a dynamic liquidity management tool that combines planned income as well as daily expenses, you can stay on top of your cash flow and minimize the risk of debt from credit card payments.