Using cards for purchases is so ubiquitous, it’s almost hard to remember when people and businesses used cash or checks. Your business will undoubtedly rely on employees making purchases with cards, and the number of options available grows along with your company. Here’s a quick overview to help you figure out what’s right for you.
Personal Cards and Corporate Cards
A personal card is just that—a card issued in an individual’s name, used for personal purchases.
A corporate card is a generic term applied to cards used specifically for business purchases.
Types of Corporate Cards
Once a company has outgrown depending heavily on personal cards, there are two main types of corporate cards to consider:Business cards are for small businesses, often issued by the company’s bank with liability tied to the business owner or CEO.
- Pros: Business cards help smaller organizations and LLCs consolidate spending and make it easier to track expenses. They also reduce time and financial burden on individual employees.
- Cons: A business card requires an individual to take on financial liability. Late or unfulfilled payments will ultimately be tied to that designated person and may affect their personal credit score.
Commercial cards are for larger businesses, and the liability is tied to the company.
- Pros: This type of card relieves any individual person from financial liability, instead centering the relationship around the company as a whole.
- Cons: These cards may be more difficult to secure. A financial audit is generally needed, and some may require annual revenue of $4M or more.
There are also a couple of types of specialized commercial cards:
- Travel and entertainment cards are used by travelers for general purchases.
- Purchase cards or P-cards are often set up for preferred rates with vendors for high-volume or frequent corporate purchases. P-cards are sometimes held by office managers or other centralized roles for use by multiple employees.
Whether personal or corporate, cards typically fall under one of three payment types.
Funds are withdrawn directly from the card account at the time of purchase (essentially like a cash payment). The account must be replenished as funds are spent.
- Pros: Allows more direct control over spending and is typically easier for businesses to obtain.
- Cons: No ability to float some purchases from month to month, which can be helpful during times of growth. Requires close monitoring to ensure enough funds are available to support needed expenditures—and if the balance reaches zero, spending is blocked.
The card issuer extends either the individual or the company a certain amount of credit. If the cardholder doesn’t pay the full amount owed at the end of the month, the card issuer will charge interest on the unpaid balance, which may be a set amount or variable. Sometimes card issuers will grant companies collateralized or secured credit, which is credit issued against an amount deposited at the bank. This is a good option for companies that might not otherwise qualify for credit.
- Pros: Allows more flexibility and month-to-month “float,” which can help during growth periods.
- Cons: Can make it harder to keep spending in check and can accumulate fees and debt if balances are not paid off regularly.
No interest is charged, but the full balance must be paid at the end of each month.
- Pros: Allows a bit more flexibility than a debit card, without the interest charges of a credit card.
- Cons: Annual fees can add up.
Card FormatsPhysical card
The normal plastic card, which has a 16-digit primary account number (PAN) with an additional 3-digit card verification value (CVV) for increased security.
- Pros: Works everywhere: swipe, tap, or insert chip to pay, or type the digits in for online payments.
- Cons: If the card is lost or stolen or the number is compromised, you have to wait for a new card with a new PAN and CVV. If you’ve stored the card with any online merchant, you’ll have to update the account to reactivate it.
A digital variant, with randomly generated PAN numbers linked to a physical card account.
- Pros: The ability to create unique virtual cards to use online, each with specific controls such as one-time use, one-vendor use, or dollar limits.
This can make payments more secure and easier to manage and track.
- Cons: May not work in all settings. It may be difficult to check in at a hotel or take a client out to dinner with a virtual card.
Corporate card programs can be company liable, employee liable, or have shared liability between the company and the employee.
A company liable model assigns responsibility for any outstanding balances to the company. Individual employees don’t have to go through a credit check, and their personal credit score is not affected if payment is delayed. Card limits are decided by the company’s standing, although the company can typically set different credit limits for individuals and restrict specific types of purchases such as flight upgrades, in-room pay-per-view movies, or cash withdrawals.
An employee liable model offers employees more flexibility with their purchasing, but at some personal risk. They’ll likely have to go through a credit check, which can affect their credit score for a year. The corporate account may show up on their personal credit history, and individuals with bad credit histories could be declined. Ultimately, the employee is responsible for payment if the employer fails to pay or refuses specific charges—and their credit score could take a hit if payment is not made on time.
Some cards follow a shared liability model, which means that both parties can ultimately be held responsible for outstanding balances, and typically extends the time frame within which a late payment affects the employee’s credit score.
Many cards offer reward programs. Points are usually offered for personal cards and business cards. Some commercial cards let companies and employees opt in, for a cost in some cases, to a points program as an employee bonus. Some cards offer cash back, usually after reaching a certain spend target. For commercial cards, this can be over $1 million in spend. Other cards offer rebates, discounts at certain vendors, etc.
- Pros: Points are highly valued by employees, since they can be exchanged for upgrades and other perks. And cash back incentives can be appealing for a business’s bottom line.
- Cons: Rewards may encourage unnecessary spending, and it’s crucial to look at the total cost of a program, including annual fees and interest charges.
Which program is right for you?
Most companies start with a mix of programs in place, depending on the maturity of the business, its ability to get credit, and its fiscal culture. Here’s what we generally see:Predominantly personal cards
Employees use their personal cards for work travel and other purchases. They submit expense reports and get reimbursed by the company.
- Pros: Many believe employees will be more responsible about purchases if they’re “on the hook” for spend. The company can choose not to reimburse out-of-policy expenses. The company also gets a bit of “float” on spend, not having to pay out of pocket until the expenses are filed.
- Cons: Employees have to pay for business expenses out of pocket, which can be a hardship for some, especially when it’s an expensive trip. There’s little visibility for the company until expense reports are filed. Any hiccups in the reimbursement process impact employees and can hurt their credit score.
Predominantly corporate cards
Employees use company cards for travel and other discretionary business expenses.
- Pros: Better visibility, more controls, easier and less burdensome for employees.
- Cons: Less personal choice or ability to earn points for employees, reduced float, increased potential for fraud or corporate liability.
A mix of personal and corporate cards
In this approach, corporate cards are reserved for executives or the sales team, but the majority of employees use personal cards. Another variant is an optional corporate card program, in which employees can choose to use personal cards because they want to keep the points.
- Pros: Employees may have more choice and ability to accrue points.
- Cons: Messy for the back office to manage. Requires reconciling and auditing multiple accounts, multiple reimbursement processes, and accruals.
TO THE POINT
The corporate card program you choose affects your overall operations as well as your culture. Choosing a program that offers the right level of control while empowering your employees to make strategic spending decisions helps you achieve more as you grow.
The materials on this blog are provided for informational purposes only and do not reflect the opinions Central Bank of Kansas City, Member FDIC. Blog posts may contain links to content on third-party websites which are provided for your convenience; please note that linked sites may have a privacy and security policy different from our own, and we cannot attest to the accuracy of information. Central Bank of Kansas City does not guarantee nor expressly endorse any particular product, service or third-party content.