USB flash drives are fast enough to store data, and yes, there are limitations.
Using a compatible flash drive over 1 GB, you can reserve a maximum of 16 GB for profiles, game saves, and downloadable content. To use USB storage, you'll need to configure it first. Plug it in and go to System Settings, Memory, then select your device to start setting it up.
Supporting USB storage devices up to 16GB in size is a huge increase in storage over any solid state memory storage solutions currently available for Xbox 360. Users that need more storage have options in the Xbox 360 hard drives, which are available for purchase separately.
You may want to read the official help page for more info.