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Pros and Cons of Prepaid Business Credit Cards
September 04, 2018
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Pros and Cons of Prepaid Business Credit Cards

Credit cards aren’t for everyone. If your company struggles with budgeting, a high-limit credit card might do more harm than good. High-interest debt can torch your finances and even harm your personal credit score. That’s why many consumers turn to prepaid cards in the aftermath of the financial crisis.

Prepaid credit cards can allow you to set a specific spending limit because YOU must provide the capital, not a card provider or bank. When you get a prepaid card, you 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 to help you decide if they’re right for your business.

What are the Benefits and Drawbacks to 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 don’t need to provide your credit history or financial statements. Since you aren’t borrowing money, you don’t need to prove your creditworthiness to receive a card.

2. You Can Keep Expenses Under Control

Spending can get out of hand when all you’re doing is swiping a card. 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 providing your own limit. No more brainless swiping; every transaction must be calculated.

3. You Can Set Limits on Employee Spending

If you have employees who travel, giving them credit cards can make it easier to handle bookkeeping. Having business expenses clearly listed on a credit card statement makes tracking a simple 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. Why? 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, 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 Stolen

Since your money is funding the prepaid business credit card and not bank financing, there’s less incentive for recovery if it’s 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 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 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’s fees for setting up the card, ATM usage, inactivity, too much activity, reloading the card, and for certain purchases and transactions. Due to this, before getting a prepaid card, you’ll need to diligently review the fees to ensure that you can afford them.

4. No Points, Rewards, or Benefits

Credit card companies want you to use your card as much as possible, so they give you all sorts of incentives. You can get cash back, airline miles, and even free supplies with some business credit cards. 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 business credit cards might be right for your company, but you should do the necessary research to find one that’s appropriate. If you don’t qualify for traditional credit cards, a prepaid business card could add a lot of value to your company. Still, if your credit score is high and budgeting is a breeze, a traditional business credit card is probably your best bet.

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].