Understanding cashback: what it is and how it works
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The basic concept of business is simple: You spend money to earn money. However, when you spend money in business, it can take some time for you to generate money as a result.
Wouldn’t it be great if your business could earn some kind of return as soon as you spend money?
It can, thanks to cashback. Read on to learn what cashback is, how it works, the different types of cashback available to you, and how you can maximize your earnings as you spend.
What is cashback?
Cashback is an incentive typically used by credit card companies in an attempt to attract new customers to their lending products. If you use a cashback rewards credit card when you make business purchases, your credit card lender essentially refunds a small portion of your total purchase each time you swipe your card.
The percentage of the cashback you earn may be fixed or variable, and there may be limitations on which purchases qualify for cashback. That creates some confusion about these credit card offers and how to earn the most money possible when you use them.
How does cashback work with credit cards?
The typical cashback business credit card works like this:
- You use the credit card to make purchases for your business or pay your business’s bills.
- The credit card lender rewards you for using its credit card by giving you a small percentage of your purchase total back as cashback rewards.
- The cashback rewards accumulate on your account until you decide it’s time for you to redeem them.
- You redeem your cashback rewards to pay for just about anything you’d like.
Keep in mind that credit card lenders are their own companies and create their own rewards programs. That means there are some differences in the rewards offered by different cashback credit cards.
You’ll typically receive cash rewards in one of two ways:
- Fixed rewards: Some cards simplify cashback by offering a fixed rewards percentage. For example, with Ramp, you’ll earn 1.5% back on all purchases no matter what you buy or how much money you spend.
- Complex rewards: Other cards offer complex rewards programs with each spending category offering a different level of rewards. While the thought of advancing to the higher rewards levels may be appealing, these programs can be confusing for some cardholders, leading to fewer cashback earnings.
Once you earn a meaningful amount of cash, you’ll want to redeem your credit card rewards. This is typically done online or by calling your lender. In most cases, these are two cashback reward redemption options.
- Statement credit: Use your cashback rewards to reduce the overall balance you owe.
- Gift cards: Many cashback credit card providers offer you more bang for your buck when you redeem your cash for gift cards to popular stores and restaurants. For example, $20 in cashback rewards can translate into a $25 gift card.
Does cashback expire?
The answer to this question largely depends on the cashback card you choose. In some cases, the cashback you earn will expire after a predetermined period of time if you don’t redeem your rewards.
However, you shouldn’t apply for these types of cards. There are plenty of offers, like Ramp's, that give you all the time in the world to redeem your rewards.
Tips for maximizing cashback rewards
There are three types of cashback:
- Fixed: This offers a fixed percentage back every time you swipe your card.
- Tiered: This offers larger percentages of cashback when you hit certain spending thresholds.
- Variable rate: This offers a different rate of cashback for different categories of purchases. For example, you may earn 2% at restaurants and 1% at gas stations.
If you’re going to use a cashback credit card, it only makes sense that you take advantage of opportunities to optimize your earnings. Some of the best ways to maximize your cashback rewards include:
- Get rid of employee reimbursement programs: Use an option like Ramp to provide each of your employees with a spending card. Each card comes with spending limits and restrictions you control, and you’ll get 1.5% back when your employees use them.
- Avoid complex programs: It may seem enticing to earn more on specific categories, but the extra earnings are often limited. The complexity of these programs means you’ll have to dedicate more time to managing your credit card. Instead, stick with fixed-rate cashback rewards.
- Remember to redeem: Even if your rewards never expire, if you never redeem your cashback, your rewards are of no value to you. Make sure to redeem your rewards regularly to get the most out of your cashback card.
Choosing a cashback credit card
Here’s what you should look for as you compare cashback offers:
- Low interest and fees: You don’t earn anything if the fees you pay cost more than the cashback you redeem. Pay close attention to interest and fees.
- Rewards structure: It’s best to steer clear of complex rewards programs and focus your efforts on fixed-rate programs that are easy to understand.
- Reward expiration: Look for credit card offers with cashback rewards that never expire.
- Other features: Some cards, like Ramp, are much more than spending accounts. They offer other features like accounting integrations, automated receipt tracking, and more to help your business thrive.
Get Ramp to simplify cashback for your business
If you’re not already using Ramp for your business, now’s the time to start. We offer unlimited spending cards to empower your employees while imposing limits and spending restrictions. Our platform also takes care of expense tracking, automatic receipt matching, and more to streamline the accounting process.
The best part is, not only is the platform free with no interest, annual fees, or other typical credit card fees, but you’ll actually earn 1.5% cashback every time you or your employees use your corporate card to make a purchase. Get Ramp today to start cashing in.
The amount of cashback you can earn with a business credit card largely depends on the credit card provider and the offer you choose. Although some companies impose limits on cashback, others don’t. In fact, with Ramp, you’ll earn 1.5% cashback on an unlimited basis, regardless of how much money you spend per year.
There are several factors you should consider before you sign up for any credit card, cashback or otherwise. Some of the most important include:
- Interest & Fees: Many cashback credit cards come with a high interest rate or annual fees and other fees. Be sure to read the terms and fee disclosures carefully before you choose a card.
- Program requirements: Business credit cards can be difficult to get your hands on, especially those that offer rewards like cashback.
Liabilities: Some lenders may require you to make a personal guarantee to access a cashback business credit card. This could lead to personal financial hardship if your business doesn’t succeed.
You should be able to use your cashback rewards for any purchase you’d typically use cash for. However, look at your credit card’s terms and conditions to find out if there are any limitations to the use of your cashback rewards.