Corporate cards

What Are Corporate Cards?

Corporate cards are payment instruments issued by financial institutions to businesses for use by their employees to make authorized purchases on behalf of the company. These cards are a core component of financial management for many organizations, providing a structured way to handle business expenses. Unlike personal credit cards, corporate cards are primarily designed to streamline expense management, enhance financial controls, and improve the tracking of operational expenses. They are crucial for managing everything from routine office supplies to significant travel and entertainment costs incurred by employees.

History and Origin

The concept of dedicated payment systems for business travel began to emerge in the mid-20th century. While early forms of commercial travel cards, such as the Air Travel Card, appeared as far back as 1937 for centralized billing of airfare, the modern iteration of corporate cards gained traction in the 1960s and 1970s. During this period, major financial firms, leveraging their presence in the travel and entertainment (T&E) industry, began offering specific corporate card programs. Initially, there was some resistance from companies hesitant to issue credit cards directly to employees due to concerns about misuse. However, the introduction of liability waivers and later, card-less accounts known as "Ghost Cards" for centralized charging, helped pave the way for wider adoption. By the mid-to-late 1980s, bank card issuers developed more robust corporate card programs, and the late 1980s saw the introduction of the first Procurement Card (P-Card), specifically designed for non-T&E business supplies for the U.S. Federal Government.⁴

Key Takeaways

• Corporate cards are payment tools for employees to make company-authorized purchases, centralizing business spending.
• They provide businesses with enhanced visibility and control over expenses, aiding in budgeting and compliance.
• The liability structure for corporate cards can vary, with responsibility typically resting with the business, though employee liability options exist.
• Corporate cards streamline the reimbursement process, reducing the need for employees to pay out-of-pocket.
• They often come with features like spend analytics, fraud protection, and integration with accounting software.

Formula and Calculation

Corporate cards do not involve a specific financial formula or calculation in the same way that investment returns or financial ratios do. Their utility lies in facilitating transactions and managing cash flow. The primary "calculations" associated with corporate cards involve monitoring spending against predefined limits, tracking transaction fees, and calculating overall expense totals for financial reporting.

Interpreting Corporate Cards

Corporate cards are interpreted as a strategic tool for operational efficiency rather than a financial asset to be valued. Their effectiveness is measured by how well they enable a company to control spending, improve record-keeping, and reduce administrative burdens. For finance departments, a well-managed corporate card program means clear visibility into accounts payable, fewer manual reconciliations, and the ability to enforce spending policies. They can also indicate a company's approach to employee empowerment and trust, as employees are entrusted with direct purchasing power. The presence of corporate cards often signifies a more mature approach to managing working capital and operational expenditures within an organization.

Hypothetical Example

Consider "TechSolutions Inc.," a growing software company. Traditionally, employees paid for client dinners, software subscriptions, and travel expenses out of pocket and then submitted reimbursement requests. This led to delays, manual paperwork, and often, frustration for employees waiting to be paid back.

To streamline this, TechSolutions Inc. implements a corporate card program. They issue corporate cards to their sales team, project managers, and executives.

1. Policy Setting: The company sets daily spending limits of \$500 for meals and \$2,000 for travel-related expenses on each card.
2. Employee Use: A sales manager, Sarah, uses her corporate card to book a \$1,500 flight for a client visit and pays for a \$150 client lunch.
3. Real-time Tracking: The finance department at TechSolutions Inc. sees these transactions instantly through their expense management platform linked to the corporate cards.
4. Automated Reconciliation: Sarah uploads a photo of the lunch receipt through a mobile app, categorizing it as "Client Entertainment." The system automatically matches the receipt to the transaction.
5. Simplified Reporting: At the end of the month, the finance team generates a report showing all corporate card spending, easily differentiating between travel and entertainment. This process eliminates the need for Sarah to submit a formal expense report and speeds up the company's financial reporting cycle.

Practical Applications

Corporate cards are widely applied across various business functions and industries to optimize payment processing and expense oversight.

• Business Travel: Companies issue cards to employees for flights, hotels, meals, and other travel-related expenses, centralizing control over travel spending.
• Procurement: Procurement cards (P-cards), a type of corporate card, are used for purchasing office supplies, minor equipment, and other recurring business necessities.
• Marketing and Advertising: Marketing departments often use corporate cards for online ad campaigns, subscriptions to marketing software, and event sponsorships.
• Software and Cloud Services: As many businesses rely on Software-as-a-Service (SaaS) and cloud computing, corporate cards facilitate easy and trackable payments for monthly subscriptions.
• Compliance and Taxation: Corporate cards simplify the collection of transaction data, which is essential for adhering to tax regulations, such as those outlined by the IRS for deductible business expenses. The IRS Publication 463, "Travel, Gift, and Car Expenses," provides detailed guidance on record-keeping for such expenses.³

Limitations and Criticisms

Despite their advantages, corporate cards come with limitations and potential drawbacks. A significant concern is the potential for misuse or unauthorized spending by employees. Without robust financial controls and clear spending policies, employees might exceed limits or use cards for personal expenses, leading to reconciliation issues and potential fraud prevention challenges.

Another criticism revolves around the liability structure. While many corporate card programs primarily hold the company liable for debt, some may involve individual employee liability or joint liability, which could negatively impact an employee's personal credit score if misused or if the company defaults. Companies must also establish clear guidelines to mitigate such risks and protect employees.² Furthermore, not all vendors accept credit card payments, or some may impose higher fees for card transactions, requiring alternative payment methods and potentially complicating accounts payable processes. Despite the numerous benefits, businesses should understand these potential pitfalls and implement comprehensive policies and monitoring systems.

Corporate Cards vs. Business Credit Cards

While often used interchangeably, "corporate cards" and "business credit cards" serve distinct purposes and are generally aimed at different types of organizations, primarily differentiated by the card issuer's liability structure and typical eligibility requirements.

The key difference lies in the ultimate financial responsibility and the scale of the business. Corporate cards are designed for enterprises that need robust control over employee spending and centralized risk management, whereas business credit cards cater to smaller businesses where the owner often retains personal liability.

FAQs

Q: Who is responsible for paying off a corporate card?

A: In most corporate card programs, the company is primarily responsible for paying off the balance. However, some programs may involve individual employee liability, where the employee is responsible for repayment, or joint liability, sharing responsibility with the company.

Q: Do corporate cards affect an employee's personal credit score?

A: Generally, no. Corporate cards are issued to the business, and the company is typically the primary obligor, meaning the card activity does not appear on an employee's personal credit score report. Exceptions exist if the program involves individual employee liability or a personal guarantee.

Q: How do corporate cards help with expense reporting?

A: Corporate cards streamline expense management by centralizing transactions. Many come with integrated platforms that automatically capture spending data, allow for digital receipt uploads, and categorize expenses in real-time. This significantly reduces manual data entry and speeds up the reimbursement and reconciliation processes.

Q: Can corporate cards be used for personal expenses?

A: Corporate cards are strictly intended for business-related expenses. Most companies have clear policies prohibiting personal use. Misuse can lead to disciplinary action, including termination, and may require the employee to immediately repay unauthorized charges.

Q: Are corporate cards only for large companies?

A: While traditionally associated with large enterprises due to their more stringent eligibility criteria and features designed for scale, the market for corporate payment solutions is evolving. Smaller businesses and startups are increasingly adopting corporate card-like offerings from fintech companies that provide similar benefits like spend control and financial reporting tools, often without the high revenue requirements of traditional corporate card issuers. The global commercial corporate card market is projected for significant growth, reflecting adoption across various business sizes.¹