What is a secured business credit card?

Whether you want to launch a new business or expand your existing company, financing is a common issue for small business owners. Businesses typically need several years of revenue and an established credit history to qualify for financing; Getting approved for a credit card or unsecured loan can be difficult without a strong business credit report.

Believer Business credit cards They are tools you can use to build or rebuild your company's credit, but they can have high fees and annual percentage rates (APRs).

What is a secured business credit card?

As a business owner, establishing 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 company's credit history; If you haven't established credit yet, you won't qualify for traditional financing options, including credit cards or unsecured business loans. It's a common problem for those who are building a business from the ground up.

“When we surveyed our network of business owners, access to capital was the No. 1 challenge they faced,” 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 helps you build credit for your business. By opening a secured card, you can practice good credit habits and improve your company's creditworthiness. Over time, this may allow you to qualify 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 vendors or defaulting on a previous business loan — you can also use a secured business credit card to rebuild your company's credit.

How do secured business credit cards work?

Secure business credit cards work similarly Secured consumer cards. Secured credit cards require the user to deposit cash to secure the card. You can use your card just like a traditional unsecured credit card; You can use it to purchase items in person and online.

Secured business credit cards typically have credit limits equal to security deposit amounts. The required deposit is usually at least $500.

As you use the card and make payments, the issuer reports your activity to one or more business credit bureaus. According to Greg Ott, CEO of Nav, a digital platform that connects small business owners with financing options, choosing a card that reports to business credit bureaus is essential in building your credit history as a business.

“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 are reporting to the three business credit bureaus — Experian, Dunn, Bradstreet and Equifax — because you never know which business credit bureau lenders and credit providers are going to pull or rely on.”

If you use the card responsibly and make all your payments on time, the card issuer reports this activity to the offices. Consistent positive reports of positive account management help boost business credit scores and improve your company's overall creditworthiness.

To get all the benefits of a secured card, limit your card usage. Keeping your balance low will improve your condition Use of creditwhich is an important factor in determining the creditworthiness of your company.

Pros and cons of a secured business credit card

If your business is new, getting a secured card can allow you to establish credit for your business. However, there are some important drawbacks to keep in mind.

He explained the pros

Accepts new businesses and those with poor credit

For most types of financing, e.g Unsecured small business credit cards or loans, your business typically needs an established credit history and several years of revenue. Otherwise, you will not qualify for a line of credit or loan.

In contrast, secured cards are available to new businesses and companies with troubled credit histories or no credit, and using the card can improve your company's credit.

Possibility of obtaining bonuses and bonuses

You can qualify for rewards and sign-up bonuses with some business credit cards. If your card has a rewards program, you can earn points, miles, or… Cash back On your business purchases.

You may receive additional insurance benefits

Credit card benefits It varies by card and issuer, but some secured business credit cards provide insurance coverage to cardholders. Depending on the card, you may qualify for flight accident insurance, emergency ticket replacement, lost baggage insurance, or rental car accident coverage. For business owners who travel for business, these perks are beneficial.

Cons explained

High interest rates

Like unsecured cards, secured business credit cards charge interest on balances carried over from the previous statement period.

Because guaranteed business The cards are geared toward startups Those with poor credit tend to have high annual percentage rates (Annual interest rate). 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 fees

In addition to the high APR, you may have to pay monthly or Annual feesLate payment penalties and foreign transaction fees. Over time, these fees can significantly drain your company's finances.

However, not all cards charge all these fees, so researching all of your options is essential.

“If you shop around, you can find cards with lower annual fees or no annual fees,” Brewster said. We're proud to not charge any annual fees on our Hello Alice Secured Mastercard or unsecured card, which is somewhat unique.

A relatively high deposit is required

With a secured consumer card, deposits can be very low; For example, some personal secured cards allow you to deposit an amount as small as $49.

Credit card issuers typically require much larger deposits for secured business cards. In general, minimum deposits range between $500 and $2,000.

The spending limit is linked to the deposit amount

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

Secured cards work differently. Credit card issuers base your spending limit on the amount of your deposit. In most cases, the limit will match your deposit, but some issuers will set a higher limit, such as 110% of your deposit amount.

The card gives you the convenience of using a credit card to make transactions, but requires you to put down a large amount of cash as a deposit. For new businesses and startups with tight budgets, restricting cash flow can be difficult, and your spending is limited to the amount of cash you can commit as a security deposit.

Alternatives to Using a Secured Business Credit Card

For consumers with Bad creditThere are several ways to rebuild your credit. But for business owners, the options are few.

“There has been a proliferation of new solutions for building personal credit,” Ott said. “But there's not a lot of business credit aspect to help the small business owner build a credit file.”

However, there are some ways to lay the foundation for a positive credit history and secure financing beyond secured cards:

Create your company's credit file

One of the most common obstacles small business owners face is the lack of separation between business and personal finances, according to Brewster.

“A lot of these people (small business owners) sometimes start a business and still have other full-time or part-time jobs,” he said. “”””””””””””””””””””””””””””

Let's say you use your personal accounts for business expenses and income. In this case, financial institutions have no idea what expenses your business has, making it impossible to evaluate your company's creditworthiness.

To begin establishing your business's credit history, opening a designated business bank account is crucial so that creditors have clear information about your income and expenses.

Next, sign up for a Dun & Bradstreet Number (DUNS). DUNS is a nine-digit identifier for your company; Some grant and loan programs require businesses to submit one.

As with your personal credit report, it's wise to check your business credit reports regularly, such as once or twice a year. You can order your business credit reports online from Don and Bradstreet, Equifaxand Experian.

Apply for business grants

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

• Hello Alice. Hello Alice offers the Small Business Growth Fund Program and provides business owners with $5,000 to $25,000 in entrepreneur grant funding.
• National Association of the Self-Employed (NASE). Each year, NASE awards grants of up to $4,000 through the NASE Growth Grant Program.
• US Chamber of Commerce: Through America's Best Small Businesses—an awards program that recognizes the achievements of outstanding small businesses—businesses can win up to $25,000.
• Venmo: The Venmo Small Business Grant awards business entrepreneurs up to $10,000 in grants, and also provides award recipients with mentorship from business leaders and social media promotions.

Contact your local chamber of commerce or research Grants.gov To find grant opportunities for your business. You can also contact us Local Small Business Development Center (SBDC), which can advise you on securing capital, marketing your business and even developing business plans.

Consider getting a small loan

If you want to build your credit but want another option besides a secured credit card, a microloan may be another tool you can use.

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

You can use the Community Development Financial Institution Fund Award locator To find programs in your state.

Ready meals

As a small business owner, securing financing is one of the most difficult challenges you face. You are unlikely to qualify for most business loans or credit cards without established credit, as this is secured Business credit cards can help. However, they have their limitations.

“This is not going to be a card you can use for all your business expenses,” Brewster warned. “So it's important to think of it for what it is: a credit-building tool…that you can use to finance a portion of your business expenses.”

To take advantage of your secured business credit card and maximize its effectiveness, limit spending to no more than 10% of your funds. Credit limit. Keeping your credit utilization low and making payments on time will positively impact your business credit. Then, you can “graduate” to a traditional unsecured business credit card or a business card with perks like cash back rewards, which may offer more competitive rates and terms.