Does buying gift cards actually help businesses affected by coronavirus?

As many small and medium sized businesses have opted (or forced) to close their doors during the coronavirus outbreak, there’s been a suggestion that buying a gift card can help these small businesses out — but is that true?

The answer is a mix of yes and no.

In the United States, standard accounting rules typically dictate that gift card funds be kept in “reserve” until they are redeemed. This means that, technically, business owners can’t actually use the money from gift card sales until once one is redeemed.

Some accountants also encourage business owners to set up separate accounts for gift card funds in an approach similar to an escrow account.

At the very least, most businesses should at least be listing outstanding gift card balances as liabilities under most accounting scenarios.

In the U.S., gift cards that customers pay for also can’t expire, so they have the potential of sitting on the books for months or even years.

So, the argument that it helps with “cash flow” to pay employees and other expenses isn’t necessarily valid if the goal is solely to maintain cash flow during a time when a business can’t make sales, at least in the U.S. and for businesses following standard accounting rules.

There are also many business owners who, either because of necessity or being unaware of these guidelines, actually use the money from gift card sales to immediately to pay employees and other expenses — though this isn’t recommended and could put a business in jeopardy in the future.

During these trying times it’s likely that more business owners may draw on gift card reserves sooner rather than later — similar to delaying paying payroll or other taxes in order to keep operating. Again, this isn’t something that’s recommended by any stretch, but it’s also not realistic to think it won’t end up happening.