Why startups should use charge cards for their business credit cards
Smaller companies notoriously have a difficult amount of time getting access to credit cards. They don’t have a long operating history. Even if they’ve raised millions of dollars, there are a lot of hurdles to jump to get access to a business credit card. But startups, just like any company, need a corporate card for their expenses — and they need one yesterday.
This is the whole reason why we originally started Brex: to provide access to corporate cards for startups. We’ve since grown considerably since then to other products like e-commerce, but it’s worth taking a moment to consider why charge cards were and continue to be a good option for startups.
What is a charge card?
Charge cards are what they sound like: cards that you use to buy goods and services, and then you pay off entirely at the end of the billing period. The billing period is typically a month, but it allows users to quickly purchase products in the same way they would with a regular credit card. Charge cards can enjoy the same benefits as a regular card, such as rewards, fraud protection, and acceptance on a network like Visa or Mastercard, similar to a regular credit card.
What’s different about a charge card is that you can’t choose to pay it off over time, it must be paid back each month. Charge cards are popular with startups because most startups are not looking to borrow money with their credit cards — just use them to buy goods and services online.
The benefits of charge cards for startups
If you’re trying to recruit talent from larger and more established corporations, you’re going to have to deal with the fact that they have become accustomed to using corporate cards for their purchases. Using your personal card and waiting a long time for reimbursement can be a crappy employee experience unless there is a distinct tactical advantage (such as farming points on work travel).
Personal card use can get even more unwieldy when you’re asking for large purchases, such as a whole set of office monitors or an expensive work trip out to Europe or Asia from the United States. Lean startups don’t have a lot of capital to begin, and asking employees to foot a several-thousand dollar bill for office supplies — even if it’s for the good of the company — is a very tall order.
And, if you’ve raised the capital, you’re going to pay it off when you can anyway. Paying off interest is an additional cost burden on a startup that has to operate in a lean manner to grow. So simply getting access to a card, potentially with some rewards system in place, and the mechanisms to manage it can be more expensive than the terms themselves to begin.
The final benefit is rewards: when you’re spending a lot of money on your startup, losing out on rewards points is leaving money on the table. It may seem small, but suddenly having access to a flight from San Francisco to Tokyo that you don’t have to pay for can be a boon for a startup trying to operate within a strict budget.
Why do charge cards exist in the first place?
Charge cards can generate revenue from merchant fees (called interchange fees) like any other card, as well as any additional fees from the cardholder. While they may earn less revenue than a normal interest-bearing credit card, charge card products tend to be less risky, as the borrowers are self-selecting a product that must be paid off in full.
Charge cards also offer more control for the issuer because there is a set limit that must be paid back every month. We use the phrase “issuer” a bit loosely here as it may range from the card issuer itself to the company that issues its employees charge cards as corporate cards — both are benefiting from increased control. Charge cards offer the ability to empower employees to spend for work purposes while providing systems to ensure everything is under control.
Why do you need a corporate card?
Cards are almost universally accepted by all merchants and are especially useful when traveling abroad. Cards — credit or debit — are necessary to make online purchases, which will probably comprise the majority of your spending as a startup. So if you want to pay for servers, you probably can’t just write Amazon a check or send them a Venmo payment.
Charge cards (and credit cards) carry multiple benefits beyond that. Whenever you are purchasing with a debit card, you’re increasing your risk surface area for theft or fraud. That money comes directly out of your bank account, rather than a silo you can contain and manage, and if you don’t have access to a charge or credit card may end up slowing or crippling your operations.
Using a charge card reduces the risk by creating a standalone space for these kinds of purchases that companies can manage, reducing the overall touch points on a company’s bank account. That, in turn, reduces the risk of running your startup — which, as a startup, you probably have enough of that to deal with already.