Advantages of prepaid cards
Eligibility for everyone
With no lender or bank required to borrow from to get accepted and create an account, prepaid cards mean that you don’t need to do a credit check for whoever will be using the card. You simply load it up with cash and start spending.
Your credit score won’t impact you from qualifying
With Prepaid business cards you don’t need a strong credit history, in fact you don’t need a credit score at all to qualify. Anyone can use it, the lack of a credit check means that an employee's (or your own) potentially poor credit score will not have any influence on how you want to run and shape your business.
Much like a gift card, you buy one, load the funds onto your cards from your business current account and start paying for goods and services. Once the money runs out you either bin the card or put more money on it.
This feature attracts many types of potential users as it’s essentially cash, but conveniently stored in one card rather than having to carry around unwieldy amounts of notes and coins.
No spending what you don’t have
Unlike credit cards which could lead to accidental overspend if they don’t have spend controls already in place, prepaid cards are dependent on having funds loaded onto the prepaid card. Without enough funds available on the prepaid card transactions will simply not go through.
It also functions as a strong security feature and limitation on any spend-happy employees. It becomes far simpler to control how much of your business’ money certain team members or departments are able to access at any one time.
Disadvantages of prepaid cards
You can’t borrow money
The main disadvantage of using a prepaid card is that you can only complete transactions up to the amount your business has loaded onto your card. Not being able to borrow money can put you in a tight spot if you need to make business purchases but have no cash to back up the purchase at that moment. This is where credit cards really shine.
Limited payments usage
Prepaid cards are not accepted by all merchants. Merchants are often routed through the highest cost routing system (you can hear more about this in our podcast) this means that merchants pay more, especially for transactions that appear to be from less ubiquitous payment methods such as Mastercard and Visa. Okay
No ability to recover funds if your card is lost or stolen
Since your money is loaded onto a prepaid business credit card it’s no different from cash. Anyone who knows the pin to the card will be able to access all the money and could theoretically take all of it without you being any wiser to what’s happening to your money.
This particular issue is why at-a-glance management information solutions are so important, so that with one look you can tell if someone is draining your accounts or if it’s business as usual.
There will still be fees
No-one likes fees, but unfortunately prepaid cards come with quite a few: there’s often a setup cost, monthly access fees, ATM usage fees, foreign exchange fees, and often a nominal fee for loading money onto the card in the first place.
These five different fees can add up to a significant amount of money, and keeping costs low is a significant issue for any business.. There are fees with credit cards too for issues such as late repayments, but these fees for most prepaid cards makes it difficult at times to see the benefit.
However, the lack of interest on debt is probably the most major advantage for prepaid cards so even though there are a number of fees, they’ll likely remain static.
Advantages of business credit cards
Higher available spending limits
Credit is credit is credit.
That’s the overwhelming advantage of a business credit card. You’re borrowing money, you can spend more than what you own, it may involve going into debt, but with smart business planning you can recoup that loss and more as a result of using the credit card.
Build your credit score & access to credit
Prepaid cards rely on cash you own and have under management, you’re not getting a loan so they won’t help you establish credit. One of the simplest ways to build your credit score is to open a credit card. It means access to money, more money than you have, when you need it.
Opening a credit card can help you establish and improve your credit score. But you need to make sure that it’s not simpler to build your personal credit score with a personal credit card.
Disadvantages of business credit cards
Without the ability to set tangible limits, the total funds made available, employees can overspend and it can be difficult to set budgets. It’s not difficult to give employees a credit card and expect them to spend responsibly.
It’s important to make sure that you have a strategy in place when purchasing using borrowed funds. It’s not a card you can hand out to any employee, only those who can be trusted with the responsibility, often those in the accounting department which can be made available to other employees for specific purchases through a procurement process. If you keep the number of people with access to business credit cards small then it makes it easier to track who may have misappropriated funds if that issue ever arises.
Business credit cards aren’t right for every small business. Some businesses will never need such a significant line of credit, other credit facilities exist and are far more appropriate with much less risk attached to them.
Opening a business credit card is also often tied to your personal credit history. So in order to use this facility you need to make sure that you have a strong credit score yourself first.
What does it mean?
Businesses of different sizes need a variety of business payment card options to meet their requirements, and it’s essential for the business owners to understand the distinction between them.
Prepaid cards and business credit cards can both be used to make purchases. But the real difference between them lies in the scope of those purchases. Business credit cards are about making a bet on your company while relying on what happens in the future, prepaid cards are focused on making consistent and strategic choices to make your business better.
Neither is wrong, but you need to make sure you’re making the right choice for your business.