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. They can manage their finances while still having a card for spending by doing this. We’ll further explain what prepaid credit cards are in this post, so you can determine if they’re the right financial product for your business.
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. Therefore, if you want to buy something that costs more than your card’s balance, you won’t be able to. Prepaid cards have numerous notable advantages but aren’t without drawbacks as well. In the next section, we’ll discuss the pros and cons of using prepaid cards.
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 QualifyingIf you don’t have a high credit score, you might not qualify for a credit card with a decent interest rate. In fact, without a decent credit score, you may not be eligible for any credit card. Luckily, you won’t need to provide your credit history or financial statements with a prepaid business card. Because you aren’t borrowing money from a lender, you won’t undergo a credit check to receive a prepaid card. However, unlike other funding options, a prepaid card won’t help you build credit. Therefore, if you’re pursuing a prepaid credit or debit card for this reason, you might need to select a different financing option, such as a business loan or line of credit.
2. You Can Manage Your Business’s SpendingSpending can get out of hand when all you have to do is swipe a card to make a purchase. The transaction doesn’t feel as real or meaningful without using actual cash. 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 have to be aware of your prepaid card’s balance.
3. You Can Set Limits on Employee SpendingIf employees have access to your business’s finances, you can monitor their spending with prepaid cards. For example, if your employees frequently travel, giving them credit cards can make it easier to pay for business expenses. Plus, you can track spending for your books with a prepaid business card, but you can set limits on how much your employees can spend.
4. They’re Cheaper Than Overdraft FeesMany 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.
The Cons of Prepaid Business Credit Cards:
1. It Could Be Difficult to Recover Funds If the Card is Lost or StolenSince your money is kept in a prepaid business credit card and not in a bank account, 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. However, that’s still far less generous than the regulations regarding credit card misuse. Due to this limitation, we suggest keeping funds in a secure savings account and loading funds onto your prepaid card in small amounts as needed.
2. You Can’t Borrow Money from The BankOne of the most significant advantages of a credit card is borrowing money that you don’t have without paying interest fees for one month. If you’re under your spending limit, you can make purchases without repaying the amount until the end of the billing cycle. Credit cards help decrease spending because you don’t have to pay off your balance right away. However, if you have a prepaid card, you aren’t borrowing money, as it’s your money loaded onto the card. Therefore, you can only spend the amount that you put on it.
3. There Will Still Be FeesPrepaid business cards might not have an interest rate, but that doesn’t mean they’re free to use; in some cases, there are fees for the following actions:
- Setting up the card
- ATM fees
- Too much activity
- Loading money onto the card
- Certain transactions
- Monthly fees for maintenance
4. No Points, Rewards, or BenefitsCredit card companies want you to use your card as much as possible, giving you numerous incentives. By using your credit card, you can earn:
- Cashback rewards
- Airline miles and hotel stays
- Free business supplies