Pros and Cons of Prepaid Business Credit Cards
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 their advantages but aren’t without drawbacks as well. In this post, we’ll discuss the pros and cons of prepaid cards so that you can decide if they’re right for your business.
What are the Pros and Cons of Receiving a Prepaid Business Credit Card?
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 – or any credit card at all. 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.
On the other side, a prepaid card won’t enable you to build your credit. So, if you’re pursuing a card for this reason, you might need to find another option.
2. You Can Keep Expenses Under Control
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. By doing this, you can avoid over-swiping your card, as every transaction must be calculated.
3. You Can Set Limits on Employee Spending
In addition to setting spending limits, you can also monitor your employees’ spending if they have access to your business’s finances.
For example, if you have employees who travel frequently for their roles, giving them credit cards can make it easier to handle bookkeeping. By having business expenses clearly listed on a credit card statement, you can make tracking a simpler process. 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.
If you don’t want your employees pushing the limits of what counts as business expense, a prepaid card is a great way to prevent overspending.
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 an extra $4 in your ATM withdrawals, a prepaid card will prevent you from overdrawing your account (and will be less harsh on you if you do).
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 funding the prepaid business credit card and not bank financing, there’s less incentive for recovery if it’s lost or stolen. A 2016 statute limits prepaid credit card losses to $50 if the theft is reported within two days, but 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 buy anything you want, and you won’t have to worry about repaying 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, but with prepaid cards you aren’t borrowing anything. It’s your money on the card, and you can only spend what you put on it.
3. There Will Still Be Fees, Some More Hidden Than Others
Prepaid business cards might not have an interest rate, but that doesn’t mean they’re free to use. Prepaid credit cards come with a litany of fees, sometimes for every action you take. There are fees for setting up the card, ATM fees, inactivity, too much activity, loading money onto the card, and for certain transactions. Due to this, before you apply for a prepaid card, you should diligently review the fees to ensure that you can afford them (and that they’re worth it).
4. No Points, Rewards, or Benefits for Using Your Card
Credit card companies want you to use your card as much as possible, so they give you all sorts of incentives. By using your credit card, you can earn cash back rewards, airline miles and hotel stays, and even free supplies for your business.
In comparison, prepaid cards don’t provide incentives. When you use your own money to buy things, no points or rewards are built up. Considering all the fees involved with prepaid cards, a little reward for using them might be beneficial, but unfortunately that’s not an option with prepaid credit cards/prepaid debit cards.
Conclusion: Consider Prepaid Credit Cards to Manage Your Business’s Finances
Prepaid business credit cards might be right for your company, but you should do the necessary research to find one that’s appropriate. Read the terms and conditions, and make sure that the agreement makes sense for your business’s needs.
If you don’t qualify for traditional credit cards, a prepaid business card could add a lot of 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 August 2019.
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.