Federal Deposit
Insurance Corporation

Winter 2011/2012

Audio (MP3 4 mb)

Paying for Everyday Expenses: Understand the Rules
Business credit, debit cards carry fewer protections than those for consumers

Small businesses face many everyday expenses, from office supplies to travel. To determine how to pay these expenses, you should understand that the rules governing each form of payment differ and can affect your liability for unauthorized use. Business owners also should be aware that some consumer protections they have come to expect do not necessarily apply to businesses. Here are a few things to consider when choosing a payment method:

Credit Cards

Credit cards are a convenient option because they allow you to defer payment — that is, you will be using the card issuer’s money, not your own, until you pay off the balance.

Choose a credit card after carefully evaluating the interest rate, fees and terms. Depending on the card, it may also offer rewards. Then you should pay your card bill on time to build your company’s credit record.

You should also be aware of the potential differences between credit cards issued primarily for consumer use (for personal, family or household purposes, even if you occasionally use them for business purchases) and credit cards issued primarily for corporate, small business or other professional use (even if occasionally used for personal purchases).

Consumer credit cards carry protections for the cardholder under the federal Truth in Lending Act (TILA) that are not required for business cards. Those include new limits on issuer-imposed penalty fees on consumers (including late payment fees and over-the-limit fees) and certain changes in account terms. “Some card issuers may voluntarily extend some or all of these consumer protections to business cardholders, but they’re not required to, so look carefully at the terms and conditions you’d be agreeing to,” said Elizabeth Khalil, a Senior Policy Analyst in the FDIC’s Division of Depositor and Consumer Protection.

Also understand that your liability for unauthorized use by a thief can be greater for business credit cards than for consumer credit cards. Under federal regulations implementing the TILA, there are strict limits on a consumer’s liability for unauthorized transactions: generally, no more than $50. By contrast, if a card issuer provides 10 or more credit cards to a company for employee use, it may require the business to assume unlimited liability for unauthorized transactions. And if fewer than 10 credit cards are issued to the company, the $50 limit will apply for unauthorized use by someone other than an employee. However, if an employee is the culprit, the rules set no restriction on the potential liability for the employee or the corporation.

The bottom line: “Read all the literature and be careful what you do because the protections for business credit cards are very different from consumer cards,” said Khalil.

Debit Cards and Checks

If you don’t want to incur debt in making payments, accessing a checking account using a debit card or check is another option.

As is the case with credit cards, consumers have more protections than businesses do for debit cards. Federal law provides many protections to consumer holders of debit cards — such as limitations on liability if the card is lost or stolen — but not to business accountholders. While business credit cards can have some of these protections, business debit cards have none.

“Because federal law doesn’t protect business debit cards, it’s very important to understand the terms of your bank account agreement regarding liability for unauthorized transactions,” said Evelyn Manley, an FDIC Senior Consumer Affairs Specialist. She said that state laws regarding commercial transactions may provide some protections, so consider asking an attorney for further information.

It’s also important to know that the rules governing checks depend largely on the law of your state and can vary from those governing debit card transactions. For example, many states have adopted the Uniform Commercial Code, which generally holds the bank — not the account owner — liable if someone forges a signature on a check. But that doesn’t mean you could never be liable for losses. In general, you can protect yourself from liability by securing your checks, thinking carefully about who in your business has access to blank checks, reviewing your statements when they arrive (or more frequently via online access), and reporting any problems to your bank immediately. Your deposit account agreement may include more information about your liability for forged checks, so read it closely.

And for legal advice on the issues discussed here, ask an attorney.