Getting a new business idea off the ground isn’t easy regardless of how prepared you are. But the challenge becomes greater when you don’t have access to working capital.
As the United States Small Business Administration (SBA) notes, small business owners sometimes have to get creative when it comes to financing – relying on everything from loans to trade credit, leases, bonds, and promissory notes to fund their endeavors. A small percentage of entrepreneurs – around 10% – also use credit cards to fund their business pursuits, notes the SBA. As the data show, firms are more likely to use credit when funds are tight.
One possible solution to consider is applying for a secured business credit card. While secured business credit cards may not be the perfect solution in the long term, they can help new business owners build the credit they need to qualify for better financing down the road. Keep reading to learn more about secured business credit cards and how they work.
How Secured Business Credit Cards Work
Both unsecured (traditional) and secured business credit cards extend cardholders a line of credit. However, the similarities pretty much end there. While unsecured business credit cards don’t require collateral, secured business cards require the user to put down a cash deposit.
With a secured business credit card, credit limits are typically small – only making up around 90% of the cash deposit you put down. If you come up with $1,000 to put down as collateral, for example, your credit limit might be around $900.
You might be wondering why a business owner would bother putting down a cash deposit equal to or even less than their credit limit. The answer is simple: Since secured business credit cards report credit history to the three main credit reporting agencies – Experian, Equifax, and TransUnion – they help business owners build good credit.
In that respect, a secured business credit card isn’t really a loan; it’s a temporary exercise that lets individuals prove their creditworthiness. With responsible use and enough on-time payments, small businesses may be able to qualify for a traditional business loan or unsecured business credit card in the future.
Just like a personal secured credit card, a secured credit card for businesses will hold your cash deposit in case of default. If you fail to make payments or default on your account in any way, they may keep your cash deposit to repay monies you owe. On the flip side, your cash deposit will eventually be refunded to you if your account is in good standing when you close or upgrade your secured business card.
Benefits of Secured Business Credit Cards
Secured business credit cards aren’t perfect, but they can be extremely helpful for small businesses who need help building their business credit scores. Here are some of the most important benefits you can secure with this type of card:
Build your business credit score.
The main objective of a secured business credit card is building credit. Even though you’re required to put down a cash deposit, your responsible credit use will be reported and used to improve your credit score over time.
Learn positive credit habits.
If you haven’t used a credit card very much in the past, a secured credit card is a great way to learn positive credit habits. Use your card for small purchases as you become accustomed to the way credit works. Over time, you’ll learn how to budget for your charged purchases and anticipate your monthly bills.
Keep personal and business expenses separate.
There are myriad reasons to get a business credit card when you own your own business, one of the biggest being better organization. When you have a credit card designated just for business expenses, it’s much easier to track your business-related expenses and keep them separate from your personal spending.
The Downside of Secured Business Credit Cards
While secured business cards can be instrumental in helping entrepreneurs build credit from scratch, they come with all of the normal trappings of credit. Here are a few negatives to consider as you decide whether a secured business credit card is in your future:
You have to put down a cash deposit.
As noted before, secured business credit cards require users to put down a cash deposit. If you’re struggling to come up with funds to launch your business in the first place, coming up with the collateral for a secured card may be untenable.
Secured business credit cards tend to come with higher fees and interest rates.
While all secured credit cards are different, this card type tends to come with higher fees and interest rates. Fees can include application fees, over-the-limit-fees, annual fees, and more. If you carry your secured business credit card for a long time, these expenses can add up in a big way.
You can damage your credit and/or get into debt.
Just like any other credit card, secured credit cards can work against you if you don’t use credit wisely. If you run up your balance and only make the minimum payment, you’ll pay interest on your purchases and land yourself in debt. If you pay your bill late and/or default on your line of credit, you can leave your credit worse off than when you started.
The Bottom Line
If you’re struggling to build the credit profile your new business needs, a secured business credit card might be the answer you’re looking for. Before you apply, however, you should expect to put down a considerable cash deposit and potentially pay higher fees than average.
Over time, a secured business credit card used wisely can help you position yourself for a better loan down the road. With the right card and a smart plan, you’ll whip your business credit into better shape in no time.