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The Pros and Cons of Prepaid Business Credit Cards
March 05, 2021
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The Pros and Cons of Prepaid Business Credit Cards

Credit cards aren’t right for every small business owner. Often, if you struggle with budgeting, a high-limit credit card might do more harm than good.

High-interest debt can torch your business finances and even harm your personal credit score. Due to this, many consumers utilize prepaid card issuers in the aftermath of a financial crisis. By doing this, they can manage their finances while still having a card for spending.

What is a Prepaid Credit Card?

Prepaid credit cards allow you to set a specific spending limit because YOU must provide the capital, not a card provider or financial institution. When you receive a prepaid credit or debit card, you’ll load it with a certain amount of cash. This is your spending limit, and if you want to buy something that costs more than the prepaid amount, you’re out of luck.

Prepaid cards have numerous notable advantages but aren’t without drawbacks as well. In this blog post, we’ll discuss the pros and cons of prepaid cards so that you can decide if they’re the right funding option for your business.

What are the Pros and Cons of Prepaid Business Credit Cards?

The Pros of Prepaid Business Credit Cards:

1. Your Credit Score Won’t Prevent You from Qualifying

If you don’t have a high credit score, you might not qualify for a credit card with a decent interest rate. In fact, without decent credit, you may not qualify for any credit card.

Luckily, with a prepaid business card, you won’t need to provide your credit history or financial statements. Since you aren’t borrowing money, you won’t have to undergo a credit check in order to receive a card.

In comparison, a prepaid card won’t help you to improve your credit score. Therefore, if you’re pursuing a prepaid credit or debit card for this reason, you might need to find another financing option.

2. You Can Manage Your Business’s Spending

Spending can get out of hand when all you have to do is swipe a card in order to make a purchase. Without using actual cash, the transaction doesn’t feel as real or meaningful. In fact, studies show that consumers spend more when using credit cards.

With a prepaid card, you might not feel the pain of handing over cash, but you’ll be able to keep spending down by setting your own limit.

3. You Can Set Limits on Employee Spending

If employees have access to your business’s finances, you can monitor their spending with prepaid cards.

For example, if your employees travel frequently, giving them credit cards can make it easier for them to pay for things. Plus, with a prepaid business card, not only can you track spending for your books, but you can set limits on how much your employees can spend.

4. They’re Cheaper Than Overdraft Fees

Many business owners use prepaid credit cards instead of traditional bank accounts because the overdraft fees on prepaid cards are usually cheaper than those on checking accounts. If you’re constantly getting hit with $35 charges for taking out extra money in your ATM withdrawals, a prepaid card will prevent you from overdrawing your account.

Overdrawing fees can add up quickly, so consider using a prepaid card to combat this common issue.

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The Cons of Prepaid Business Credit Cards:

1. It Could Be Difficult to Recover Funds If the Card is Lost or Stolen

Since your money is kept in a prepaid business credit card and not in a bank, there’s less incentive for recovery if it’s lost or stolen.

2016 statute limits prepaid credit card losses to $50 if the theft is reported within two days. However, that’s still far less generous than the regulations regarding credit card misuse.

2. You Can’t Borrow Money from The Bank

One of the biggest advantages of a credit card is borrowing money that you don’t have without having to pay interest fees for one month. If you’re under your spending limit, you can make purchases without having to repay the amount until the end of the billing cycle.

Credit cards help flatten out spending because you don’t have to pay off your balance right away. However, with prepaid cards you aren’t borrowing anything, as it’s your money on the card. Therefore, you can only spend the amount that you put on it.

3. There Will Still Be Fees

Prepaid business cards might not have an interest rate, but that doesn’t mean they’re free. There are typically fees for the following actions:

  • Setting up the card
  • ATM fees
  • Inactivity
  • Too much activity
  • Loading money onto the card
  • Certain transactions

4. No Points, Rewards, or Benefits

Credit card companies want you to use your card as much as possible, so they give you numerous incentives. By using your credit card, you can earn cash back rewards, airline miles and hotel stays, and even free business supplies.

In comparison, prepaid cards don’t provide incentives. When you use your own money on a prepaid card to make purchases, no points or rewards are earned. Considering all the fees involved with prepaid cards, a little reward for using them might be beneficial. Unfortunately, that’s not an option with prepaid credit cards/prepaid debit cards.

Conclusion: Consider Prepaid Credit Cards

Prepaid business credit cards might be right for your company, but you should conduct research to find one that’s appropriate. Read the terms and conditions, and make sure that the agreement fits your business’s needs.

If you don’t qualify for traditional credit cards, a prepaid business card could add value to your company’s finances. However, if your credit score is high and budgeting is a breeze, a traditional business credit card is probably your best bet.

Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2021.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].