A prepaid business credit card allows businesses to set spending limits and monitor expenses without the risk of accumulating debt. However, prepaid credit cards often come with higher fees and more difficult for building credit.
By Brad Nakase, Attorney
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As a funding option, credit cards can be problematic for a small business owner, especially those who struggle with budgeting. High-interest debt can seriously harm a company’s finances and hurt a business owner’s personal credit score. Because of this, many individuals take advantage of prepaid card issuers after a financial crisis. This way, they can manage their finances while still maintaining a card for spending.
A prepaid credit card allows a business owner to create a particular spending limit because they are the ones offering up the capital, not a financial institution or card provider. When a business owner gets a prepaid credit or debit card, he or she will put a certain amount of money on it. This means that if the owner wants to buy a good that is worth more than the card’s balance, he or she will not be able to do so. There are a number of advantages to prepaid cards, but there are also negatives. In this article, our small business law attorney discusses the pros and cons of prepaid business credit cards.
If a business owner does not have a high credit score, he or she may not qualify for a credit card with a good interest rate. Without a good credit score, in fact, an individual may not qualify for any credit card at all.
Thankfully, a business owner does not need to offer his or her credit history or any financial statements to apply for a prepaid business card. As the business owner is not borrowing cash from a lender, he or she does not have to go through a credit check to qualify.
That said, a prepaid card will not help a business owner build credit, unlike other financing choices. This means that if a business owner is interested in building his or her credit, he or she would be advised to pursue a different financing option, like a line of credit or a business loan.
When all a business owner has to do is swipe a card to get something they need, spending can easily get out of hand. Studies have shown that people spend more freely when using credit cards instead of cash.
With a prepaid card, a business owner must be conscious of their card’s balance.
If a business owner allows employees access to the company credit card, he or she can monitor spending using prepaid cards. For instance, if a particular employee travels frequently for his job, a business owner can track their spending and set limits on how much they spend.
Often, business owners will use prepaid credit cards because their overdraft fees are typically cheaper than those on checking accounts. A prepaid card will prevent a business owner from overdrawing his or her account, thus saving them $35 overdraft fees.
Because the business owner’s funds are stored in a prepaid credit card and not in a bank account, it is harder to recover funds if the card is lost or stolen. A 2016 law mandated that prepaid credit card losses are limited to $50 if the theft is reported in two days or less. Because of this limitation, it is recommended that business owners store funds in a secure savings account and load money as needed on the prepaid card.
One of the greatest advantages of using a credit card is that a business owner can borrow money without paying interest fees for one month. If the owner remains under the spending limit, then he or she can make purchases without repaying the amount until the close of the billing cycle.
Credit cards can help reduce spending because the individual does not have to repay the balance immediately. That said, with a prepaid card, the owner is not borrowing the money because it is their own money that is loaded onto the card. This means that he or she can only spend the amount that they put on it.
While prepaid business cards do not have an interest rate, they are still not free. Sometimes, there are fees for the following:
Because credit card companies want people to use their card a lot, they offer many incentives. By using a credit card, an individual can earn:
A prepaid business card does not offer any rewards, by contrast.
While prepaid business credit cards may be a good choice for one’s company, one should do research to find the right card. A business owners should compare how prepaid business credit cards benefit the company. It is important to read the terms and conditions to make sure that the agreement suits the company’s financial needs.
If a business’ credit score is high and budgeting is no trouble, then a traditional business credit card would likely be preferable.
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