Corporate Cards vs. Reimbursement: Choosing the Model Before Choosing Software

The first step in assessing spend management platforms is to reach consensus on the expense execution model to be adopted by US finance leaders, i.e., whether to use corporate cards or an employee reimbursement system. This choice determines the source of cash flow obstacles and burdens involved in management tasks. Corporate cards make it possible to benefit from the company's credit and gain the right to monitor spending in real-time. Nevertheless, strict control policies must exist to eliminate the possibility of unauthorized expenditures. 

Employee reimbursement models allow companies to control expenses until they are vetted; however, it is equal to delays in tracking expenses, blind spots in terms of accounting for month-end balances, and extra cash flow pressure on employees. Moreover, while being an efficient solution, this approach is legally required by state indemnification laws, such as §2802 of the California Labor Code.

What is Corporate Cards vs. Reimbursement?

The decision to select between employee reimbursements and corporate cards depends on who pays upfront and where the controls of administration lie. Corporate credit card processing can be thought of as a model in which a business gives credit or prepaid cards to employees or heads of departments. The payments made while making business purchases go directly to the account of the business and allow real-time oversight of payments made. With this model, the risk of spending is reduced, but it requires ongoing card management and continual monitoring of activity.

The model of employee reimbursement turns things upside down because employees pay upfront for everything, including travel, meals, and materials, using their personal funds. They then submit documents regarding these payments, which include all of the receipts, and they can get paid back. For businesses, this means more money stays upfront since payment is done only after the necessary procedures to verify expenses have been completed. Nevertheless, it leads to delays in the accounting at the end of every month and burdens employees with the task of funding their employer.

Why does Choosing a Spend Model matter before Picking Software?

1. Engine Architecture Mismatch: SaaS spend management software is for specific architectures. Card-first platforms work very well for issuing virtual cards and matching receipts automatically, but have limited capabilities in multi-level approval of reimbursement requests. Expense-first systems are good at controlling such aspects as mileage, per diem, and foreign currency, but do not provide the same level of card control. Choosing the software means that one has to make changes in operations to fit into the system developed for a different purpose.
2. The Dangers of Compliance in Labor Laws: If you require employees to pay for their expenses before getting reimbursed for them, you will quickly run into issues regarding labor compliance. States like California and Illinois have strong payroll laws, such as §2802 of California's Labor Code, which requires companies to reimburse their workers for the necessary costs incurred while working. If you use software that does not automatically perform the necessary calculations, your company will be exposed to class-action suits.
3. Financing and Money Transfer Process: In the case of implementing expenditures through credit cards, your business will require a good credit line and a method of clearing your balances every day. On the other hand, reimbursements will depend on the availability of funds to cover wages regularly. Thus, your organization should make sure that the new system works properly with its banking system.
4. Compliance and Speed of Accounting Process: A corporate credit card system allows for an ongoing process of organizational expenses collection in real time. In contrast to that, a reimbursement system will delay the end of the accounting period, as employees will be busy gathering their reports. If you choose software without taking into account your reconciliation rhythm results in poor chart-of-accounts mapping and manual workarounds for your ERP. 
5. Employee Culture of Adoption and Expenditure: A problem linked to incongruity in expenditure policy cannot be resolved by means of software. Remote workers without the means to make personal cash payments cannot be coerced into using reimbursed expenses software. If businesses provide corporate cards to non-exempt employees without setting up sufficient control capabilities in their software, it can increase the risk of unauthorized transactions and off-the-clock disputes over administrative issues. 

How do Corporate Cards and Reimbursement Actually Differ?

1. Funding source and Cash Flow

• The company makes purchases directly with business funds, as there is no need to use any personal funds.
• Employees spend their personal funds upfront on various transactions and get reimbursed later.

2. The order of Spending Controls

• The controls are proactive (before the transaction occurs). The financial department formulates precise merchant categories, limits on spending in a given transaction, and the expiration rules for cards before transactions are processed.
• The controls are reactive (after the transaction occurs). The regulations are implemented after the expenses take place and during the approval process of the finance department.

3. Reconciliation & Financial Self-Awareness

• Instant insight into transactions. Charges are entered straight into the ERP system on a daily basis, enabling ongoing monthly accounting.
• Expenses are seen only at batch intervals. The financial CRM department only receives knowledge of expenses when expense reports are officially submitted by employees, resulting in unaccounted liabilities at the end of each month.

4. Administrative Workload and Costs

• Very low administrative involvement. Receipts directly linked to items in the bank statement via mobile photo or SMS integration.
• Very close administrative attention required. Needs multi-layer approval processes, manual checking of receipts, itemization of each transaction, and direct payments through ACH.

5. Employee Expenses

• No need to have personal debt. No out-of-pocket expenses and worries about overdue charges from the personal credit account.
• Short-term transfer of financial burden. This can be troublesome for employees making low wages and working overtime.

6. U.S. Legal and Compliance Exposure

• Direct vendor billing reduces the risk of employer liability under state reimbursement requirements.
• Subject to strict regulations requiring full reimbursement of work-related expenses pursuant to state laws, among which are such mandates as California Labor Code §2802 and the Illinois EOR Act.

What are the Key Benefits of each Spending Model?

1. Immediate Financial Insight: With each transaction, finance departments can see how much has been spent in the company, and this avoids surprises related to liabilities and unbilled expenses at the end of each month.
2. Prior Checking of Expenditures: Cards may come with spending limits, certain types of merchants that can be purchased from, maximum amount per transaction, and the time span of the card until it expires.
3. No More Employee Pre-payments: Employees no longer have to pay with their own card while waiting to be reimbursed, which improves the mood of the workforce management and their financial position.
4. Automated Accounting Reconciliation: Now, once there is a transaction, the data are sent via the reporting software to the accounts department automatically with minimal human involvement.
5. Rewards and More Time for Cash Flow: Companies get the opportunity to hold 30-day credit cards and at the same time get bonus points for using them or even cashback on some purchases.
6. Optimization of Working Capital: Organizations do not need to make any payments until the expense receipts and reports are created.
7. Pre-payment audit with multiple secured layers: Any payment can only be made when the accountants have confirmed payment receipts are itemized and comply with company policies.
8. Easier Governance in case of Rare/Remote Purchases: Allows for minimizing administrative activity related to issuance and management of credit cards for people who make purchases rarely.
9. Enforcement of Compliance with Policies: It encourages the workforce to stick to budgetary regulations and submit receipts on time. 
10. Minimal Karen Management Needs: The card does not require any corporate credit underwriting, collateral deposits, daily clearing, or vulnerability to theft and fraud.

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Pro-tip

Avoid the issuance of fixed numbers for software, SaaS, and recurring vendor payments. Send the limited-use on-Pay cards, limiting the use of funds and preventing hassle-free renewals.

What Risks and Downsides should you Watch Out For?

The risk of spending in an uncontrolled way or being too lenient with spending means that without severely limiting spending (by enforcing strict limits after all on company credit cards), employees will regularly use their company credit cards for personal use, and the finance department would have to recover the money after it has already been spent.

1. Credit Line and Cash Collateral Limits: Startups and small businesses with limited credit history will likely be offered lower company credit limits or may have to provide significant cash deposits as collateral.
2. Risk of Card Spam and Fraud: Distributing many credit cards, either virtual or physical, increases the risk of both credit card fraud and card-skimming, stolen credit cards, and unauthorized automatic renewals.
3. Discipline Loss with Out-of-Pocket Policy: Since employees do not spend their money from the start, they are less willing to seek cost-effective travel options and favorable rates in accordance with the organization's travel policy.
4. Problems with not registering Expenses: It will result in invisible financial liabilities that will inevitably make forecasts, AI workflow automation, and month-end closing a hassle until enough reports are received.
5. Expensive Processing and Manual Tasks: The process of verifying line items of a receipt, processing reports through several tiers of management, and effecting ACH transfer for every report incurs high labor and software costs.
6. Financial Pressure on Employees and Turnover: Making employees advance thousands of dollars for trips or remote work equipment results in poor credit ratings, dissatisfaction with work, and hiring and retention problems.
7. Liabilities of US Wage & Hour and State Compliance: Delay or absence of refunds creates violations of several statutes in various states, such as California Labor Code §2802, Illinois EOR Act, or statutes of New York, which put companies at risk of class-action lawsuits, interest, and fines.

Which Factors should guide your Decision between the two?

1. Frequency of Purchases and how Employees Spend

Identify the people involved in buying. All business travelers should have corporate credit cards. The same can apply to purchasing managers and heads of departments who process multiple transactions with vendors. On the other hand, if transactions come from employees infrequently, like buying lunch for their team, it is better to implement a reimbursement system instead of issuing cards and keeping track of dormant cards.

2. Strategy for Cash and Liquidity

The money situation for the business and the logistics of running the bank should be scrutinized. Having corporate cards gives companies lines of credit for 30 days or access to cash right away. This way, it doesn’t use the money of the employees. On the other hand, using a reimbursement system will free cash in the short term, but cause liabilities at the end of each month.

3. State Labor Law & Compliance Footprint

Take into account where your employees are located and where they are working. For example, if your company is situated in states that take a tough stance on indemnification like California (Labor Code §2802), Illinois (EOR Act), New York, and Pennsylvania, the law creates an obligation to reimburse your employees for their business expenses promptly. This implies that you will need a corporate card model or an advanced automated reimbursement system to meet these requirements.

4. Finance Team Capacity & Audit Preferences

You need to find out how much work your finance team can devote to expense auditing. The whole reimbursement process includes a significant amount of work, as it requires auditing receipts after the transaction has been done, categorizing line items, as well as performing payroll/ACH routing. Corporate card platforms facilitate the process of auditing as they use pre-transaction rules, thus eliminating any chance of manual audit.

5. Understanding the Types and Amounts of Corporate Expenditures

Assess what your business actually purchases. For example, high-value regular business liabilities like cloud hosting, SaaS subscriptions, advertising costs, and extensive travel cannot and should not be done with personal credit cards. Little variable out-of-pocket expenditure items like parking, rideshare expenditures, client coffees, or business miles fit very well into the IRS-compliant back-accountable plan procedure. 

Conclusion

Your choice between the corporate card and employee reimbursement process is a structural finance decision. Deciding on your method of payment first helps to protect your working capital, avoid operational bottlenecks, and adhere to regulations about state expense procedures. After that, choosing the right application is going to be very easy.