What is a secured business credit card?

Whether you want to start a new business or expand an existing one, financing is a common problem for small business owners. Businesses typically require years of revenue and an established credit history to qualify for financing; without a strong business credit report, approval for an unsecured credit card or loan can be difficult.

Secured business credit cards are a tool you can use to build or rebuild business credit, but their fees and annual percentage rates (APRs) can be high.

What is a secured business credit card?

As a business owner, building a credit profile separate from your personal credit is critical to your company’s success. But small business credit card issuers and lenders will base their decisions on your business’s credit history; if you haven’t established credit, you won’t be eligible for traditional financing options, including unsecured business credit cards or loans. This is a common question for those who start a business from scratch.

“When we survey our network of business owners, access to capital is the number one challenge they face,” said Matt Brewster, vice president of finance at Hello Alice, a fintech company focused on the financial health of small business owners.

A secured business credit card can help you build credit with your business. By opening a secured card, you can develop good credit habits and increase the creditworthiness of your business. Over time, it may qualify you for other types of credit, including unsecured cards or business loans.

If you’ve made credit mistakes in the past, such as missing payments to suppliers or defaulting on previous business loans, you can also use a business secured credit card to rebuild your company’s credit.

How does a secured business credit card work?

Secured business credit cards work similarly to secured consumer cards. Secured credit cards require users to deposit cash to secure the card. You can use your card like a traditional unsecured credit card; you can use it to buy things in person or online.

Typically, a business secured credit card has a credit limit equal to the security deposit amount. Typically, a deposit of at least $500 is required.

When you use the card and make a payment, the card issuer reports your activity to one or more business credit bureaus. Greg Ott, chief executive of Nav, a digital platform that offers financing options to small business owners, said choosing a credit card that reports to business credit bureaus is critical to building a business’ credit history.

“I think (credit reports) are the most important criteria for a secured business credit card,” Ott said. “They (business owners) need to make sure they report to all three business credit bureaus (Experian, Dun and Bradstreet, and Equifax) because you never know which business credit bureau lenders and credit providers are going to rely or rely on which business credit bureau .”

If you use the card responsibly and make all payments on time, the card issuer will report the activity to the bureaus. Consistent positive reports of active account management can help improve a business’ credit score and improve the overall reputation of the business.

To get all the benefits of a secured card, limit your card usage. Keeping your balance low will improve your credit utilization ratio, which is an important factor in determining your business reputation.

Pros and Cons of Secured Business Credit Cards

If your business is new, getting a secured card allows you to build credit for the company. However, there are some notable downsides to keep in mind.

Advantages explained

Accepting new businesses and businesses with bad credit

For most types of financing, such as unsecured small business credit cards or loans, your business typically needs an established credit history and several years of income. Otherwise, you will not be eligible for a line of credit or loan.

In contrast, a secured card is suitable for new businesses and businesses with questionable or no credit histories, and using the card can enhance a company’s credit.

Potential for rewards and bonuses

You can earn sign-up bonuses and rewards with certain business credit cards. If your card has a rewards program, you can earn points, miles or cash back on business purchases.

Possibility to receive additional insurance benefits

Credit card benefits vary by card and card issuer, but some business secured credit cards provide cardholders with insurance. Depending on the card, you may be eligible for travel accident insurance, emergency ticket replacement, lost luggage insurance, or car rental collision insurance. For business owners traveling on business, these perks are advantageous.

Disadvantage explained

high annual interest rate

Like unsecured cards, secured business credit cards charge interest on the balance you carry over from the previous statement cycle.

Because secured business cards are geared toward startups and businesses with bad credit, they tend to have a higher annual percentage rate (APR). In fact, APRs on secured cards tend to be much higher than the national average for consumer credit cards.

However, you can avoid interest charges by paying off the card in full before the statement due date.

Expensive

In addition to high annual interest rates, you may also be charged monthly or annual fees, late fees, and foreign transaction fees. Over time, these expenses can seriously drain your business’ finances.

However, not all cards charge all of these fees, so it’s crucial to research all options.

“If you shop around, you can find cards with lower or no annual fees,” Brewster said. We are proud that there is no annual fee for our secured card (Hello Alice Secured MasterCard) or non-secured card which is somewhat unique. “

Relatively high deposit required

With a secured spend card, the deposit can be quite low; for example, some personally secured cards allow you to deposit as little as $49.

Credit card issuers typically require a much larger security business card deposit. Generally, the minimum deposit is $500 to $2,000.

Spending limit tied to deposit amount

If you have an unsecured card, the card issuer sets a credit limit based on your credit history and income. For example, you can have a credit limit of $10,000 or more with no deposit required, and you can use the card repeatedly until you reach your spending limit.

Security cards work differently. Your credit card issuer sets your spending limit based on the amount you deposit. In most cases, the limit will match the deposit, but some card issuers will set a higher limit, such as 110% of the deposit amount.

This card gives you the convenience of making transactions with a credit card, but requires you to deposit a large amount of cash as a deposit. Restricting cash flow can be difficult for new businesses and start-ups on a budget, and your spending is limited to the amount of cash you can put in as security deposit.

Alternatives to Using a Business Secured Credit Card

For consumers with bad credit, there are several ways to rebuild credit. But for business owners, the options are few and far between.

“New personal credit-building solutions are emerging all the time,” Ott said. “But when it comes to business credit, there isn’t that much that helps small business owners build their credit files.”

However, there are ways beyond secured cards to lay the groundwork for a strong credit history and secure financing:

Build your company’s credit profile

Not keeping business and personal finances separate is one of the most common hurdles small business owners face, Brewster said.

“A lot of people (small business owners), sometimes they’re starting a business but still have other full-time or part-time jobs,” he said. “So they (their accounts) just mix it up.”

Let’s say you use a personal account for business expenses and income. In this case, the financial institution does not know which charges belong to your business and thus cannot assess the creditworthiness of your business.

To start building your business credit history, it is crucial to open a designated business bank account so that creditors have a clear view of your income and expenses.

Next, register for a Dun & Bradstreet Number (DUNS). DUNS is your business’s nine-digit identifier; some grant and loan programs require businesses to provide one.

As with your personal credit report, it’s wise to check your business’s credit report on a regular basis, such as once or twice a year.You can request your business credit report online Dun & Bradstreet, Exfaxand Experian.

Apply for a business grant

If you are starting a business or looking to expand an existing company, you may be eligible for funding from a nonprofit organization or corporation. For example, here is a small sampling of the grants available:

• Hello Alice. Hello Alice offers a small business growth fund program and grants between $5,000 and $25,000 for business owners to entrepreneurs.
• National Association of Self-Employed Employers (NASE). Each year, NASE awards grants worth up to $4,000 through its NASE Growth Grants Program.
• American Chamber of Commerce: Businesses can earn up to $25,000 through the America’s Top Small Business Program, an awards program that recognizes outstanding small business achievement.
• Venmo: The Venmo Small Business Grant provides entrepreneurs with grants of up to $10,000 and also provides winners with mentorship from business leaders and social media promotions.

Contact your local chamber of commerce or search Appropriation Network Find funding opportunities for your business.You can also contact your Local Small Business Development Center (SBDC), which can give you advice on securing funding, marketing your business and even developing a business plan.

Consider microloans

If you want to build credit but want options other than a secured credit card, a microfinance loan may be another tool you can use.

Nonprofit organizations, such as community development financial institutions (CDFIs), often provide small loans. These loans are for relatively small amounts, such as $500 to $50,000, and they often have less stringent credit and income requirements than traditional business financing options.

You can use CDFI funds Awards Locator Find programs in your state.

takeout

As a small business owner, obtaining financing is one of your most difficult challenges. Without established credit, you’re unlikely to qualify for most business loans or credit cards — and that’s where a secured business credit card can help. However, they do have their limitations.

“This card cannot be used for all business expenses,” Brewster warns. “So it’s important to think about what it is: a credit building tool … that you can use to finance some of your business expenses.”

To take advantage of a secured business credit card and maximize the card’s effectiveness, limit spending to around 10% of your credit limit. Keeping your credit utilization low and making payments on time will have a positive impact on your business credit. You can then “upgrade” to a traditional unsecured business credit card or a business card with benefits like cash back rewards, which may offer more competitive rates and terms.