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Prepaid card for business: Pros and Cons

Prepaid card for business: Pros and Cons

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Do you need a way to enforce budgeting for certain aspects of your small business? Maybe while also tracking expenses more easily than you could with cash? If so, prepaid cards might be a good option for you. Read on to learn more about how they work and who can benefit from them.

What is a prepaid card?

A prepaid card (sometimes called a stored value card) is one that needs to be pre-loaded with funds before it can be used. The funds for a prepaid card are your own money, like a debit card or a check from a bank account. The difference is that the prepaid card is not linked to a bank account or a line of credit (like a credit card).

Most card-issuers provide a prepaid card option, and prepaid cards are accepted anywhere credit or debit cards are accepted

Prepaid card pros and cons

Benefits of prepaid cards

Some of the most common benefits of prepaid cards are:

  • Anyone can qualify and use
  • No bank account required
  • Enforced budgeting
  • Security

Prepaid cards are often dismissed as expensive and inconvenient, but they meet the needs of consumers or employees who may not fit the typical mold. Prepaid cards are available for use without the anchor of a bank account or credit score, unlike credit cards and charge cards which might turn you away. Individuals without bank accounts can utilize prepaid cards instead of cash, which allows them to make online purchases and track expenses that would be impossible with cash alone.

Prepaid cards are also a more ironclad form of budgeting, getting shut off once the funds have been exhausted. Some prepaid cards will allow a slight overdraft for a fee, but you won’t get into the same trouble you could find with a credit card.

Downfalls of prepaid cards

Some of the drawbacks of prepaid cards are:

  • Fees for loading and using
  • Few protections for loss
  • No credit building
  • No rewards
  • Overdraft fees

The biggest complaints against prepaid cards all revolve around fees. There are a great number of fees associated with prepaid cards. You might incur fees for loading, using, activating, and closing prepaid card accounts. Going over your balance or zeroing out your card may also levy fees. If your card is lost or used without your permission, you are simply out that money (unlike credit and debit cards which usually offer some type of fraud protection).

While it can be helpful to get a prepaid card when you have poor credit, a significant drawback is that you can’t build credit with a prepaid card. Prepaid cards do not report to credit bureaus, so those purchases will not work to improve your credit score like a credit or charge card would. Similarly, you’ll miss out on the rewards and points accrual that you might enjoy with a credit card.

How do prepaid cards work?

It’s helpful to think of prepaid cards like gift cards. You get the card from the issuer—like a store, bank, or other financial institution—and load funds onto it. You can use the card until the funds are exhausted.

Adding funds

There are a few different methods for adding funds to your prepaid card.

  • Purchase a pre-loaded card
  • Set up direct deposit to the card
  • Bring cash or check to a retail store to add to the card
  • Transfer money from a bank account to the card
  • Deposit a check electronically to the prepaid card’s mobile application

Unfortunately most prepaid cards require you to pay a reloading fee, so try to combine and minimize your reloading to decrease costs.

Using funds

Once there are funds loaded onto your prepaid card, you can begin accessing those funds.

  • Swipe your card at any in-store POS
  • Type in your card number for online purchasing
  • Withdraw cash at an ATM

Just like adding funds, many prepaid card issuers attach fees to purchases and ATM withdrawals, so be sure you understand the terms of your prepaid card agreement before use.

How a prepaid card differs from other cards

How does a prepaid card differ from credit cards, debit cards, and charge cards?

While there are considerable similarities between credit cards, debit cards, charge cards, and stored-value or prepaid cards, the differences between them can have a big impact on your business spending. Let’s break down the characteristics of each card type.

Card type: Credit card

How it’s funded: Line of credit from card issuer

Fees: Interest on each purchase, minimum payments required monthly

Use limited by: Credit limit

Card type: Debit card

How it’s funded: Linked to a bank account

Fees: Overdraft fees

Use limited by: Amount of money in the bank account

Card type: Charge card

How it’s funded: Line of credit from card issuer

Fees: Overdraft or carrying a balance

Use limited by: Credit limit and balance paid in full each month

Card type: Stored-value or prepaid card

How it’s funded: Pre-loaded with funds

Fees: Loading, purchase, monthly use fees

Use limited by: Amount of money loaded onto the card

Credit cards are available to individuals and businesses contingent on credit scores, and can feature special rewards and perks catered to business needs or specific types of spending. A charge card is like a credit card—but must be paid in full each month. A debit card is linked directly to your bank account, and allows you the convenient spending of your own money. A stored-value card or prepaid card is loaded with your own money before use—but isn’t linked to any bank account.

Ready to get a business credit card? Follow these 6 steps to get started.

How do you get a prepaid card?

One of the appealing features of a prepaid card is that they’re readily accessible. You can pick up prepaid cards at grocery stores and even gas stations. Your bank or credit union might offer a prepaid card option, or you can get one from your favorite retail location.

Why would my business use a prepaid card?

There is a wide range of uses for stored-value cards, including:

  • Gift cards
  • Access to specific purposes, i.e. a cafeteria, laundry, transportation
  • Direct deposit for individuals without bank accounts
  • Controlled spend for travel, young users, etc.
  • Access to services such as internet access or phone calling cards

Many businesses choose to use stored-value cards for employees who do not have bank accounts, or to provide money for bonuses or funding additional job perks (such as a prepaid card for gas).

Some businesses may choose to provide employees with prepaid cards for their travel expenses to prevent overages or exposing their company card to fraud or loss.

Are prepaid cards right for your business?

Prepaid cards offer a unique and versatile financial tool that can cater to a wide range of businesses needs and preferences.

Ultimately, the decision to utilize prepaid cards should align with one's financial goals and circumstances. By weighing the pros and cons carefully, business owners can make informed choices whether it's simplifying transactions, managing expenses, or building credit for the future.

Learn how BILL Spend & Expense can help your business control spending, track expenses and help you stay on track.

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The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided "as-is"; no representations are made that the content is error free.