If you have a low business credit score or no business credit score, you may have some difficulties when it comes to establishing business credit. According to the U.S. Small Business Administration, it takes the average business between 12 and 18 months to improve its credit score. If you need credit before your business credit score improves, you need to turn to creative solutions. One way to establish or improve your business’s credit score is to open a secured business credit card account.
A secured business credit card is a credit card that uses a security deposit as collateral.
What Is a Secured Business Credit Card?
Can you get a secured business credit card? The main requirement for getting a secured business card is being able to pay a deposit. This is what sets secured credit cards apart from unsecured credit cards. Secured credit cards require you to pay a security deposit, which is what secures the card. The credit line you’re given is typically equal to or slightly higher than your security deposit. If you put down a security deposit of $1,000, your credit line will typically be $1,000.
The reason that credit card lenders are willing to issue secured business and personal credit cards is that there’s very little risk to the lender. If you stop making payments on the card, the lender will use your security deposit to pay off your card’s balance.
Other than the required security deposit, a secured business credit card works exactly like an unsecured business credit card. You charge purchases to the card and make payments when you have a balance. If you don’t pay off your balance in full each month, you pay interest on your purchases.
Advantages of a Secured Business Credit Card
The main advantage of a secured business credit card is its availability. Even if you have a very poor personal or business credit history, you may be able to obtain a secured business credit card.
You may also earn interest on your security deposit. This varies by credit card issuer, though. Some secured credit card issuers place your deposit in an interest-bearing savings account. The interest will probably not be high, but every little bit helps.
Another advantage is that other than the security deposit, the card functions just like any other credit card. For example, you can find a secured business credit card with rewards. Some credit cards will offer reward points that you can spend on travel or cash-back rewards that are applied as a statement credit.
Secure business credit cards typically report to the business credit reporting agencies, which are Dun & Bradstreet, Equifax and Experian. This means that if you have good payment habits and low credit utilization, you may see your credit score increase. If your goal is to improve your business credit score, you may want to confirm that your secured business card reports to these agencies.
If you do run into financial difficulties while you have a secured card, you won’t be sent to collections. Instead, your card issuer will keep your deposit. The late payments will still impact your credit score but not as much as adding a collections account to your record.
Many secured business credit card companies will periodically review your account along with your business and personal credit scores. If you’ve had a good payment history, you may qualify to switch to an unsecured business credit card. If this happens, your security deposit will be refunded to you.
Disadvantage of a Secured Business Credit Card
The main disadvantage of secured business credit cards for bad credit is having to come up with the security deposit. If you’re looking for a high credit line, you will need to fund that credit line with a high deposit. Some secured credit lines have low initial credit limits (and deposits) of $1,000. Other secured cards allow you to deposit as much as $100,000. That’s a significant amount of money to tie up, and you'd no longer have access to those funds.
Secured business credit cards also tend to have high fees. Most have an annual fee of $25 to $100. Some also charge you a fee for applying and for maintaining your account. Be sure to carefully review the fine print in your cardholder agreement so you aren’t caught by surprise.
You may also have high interest rates. The lowest APR you will typically find on a secured credit card is 12 percent, but many have APRs that are 20 percent or more. If you pay late, you may find yourself with a higher penalty APR. It’s in your best interest to pay your balance in full each month so you don’t pay interest on your purchases.
Does a Secured Credit Card Build Credit Fast?
Unfortunately, building or rebuilding your credit takes time. A secured business credit card can help, but you have to use your card correctly. Your credit card utilization has a significant impact on your credit score. Although estimates vary, you should strive to keep your credit balance below 30 percent of your total available credit. For example, if you have $10,000 in available credit across all of your credit lines, you should keep your balances below $3,000.
If you have no credit history, it may take you as few as six months to establish your credit. If you have poor credit, though, it may take more time for you to recover. In addition to lowering your credit card utilization, you will also need to pay on time. With perfect credit card use, it will typically take at least a year to see significant improvements in your business credit score. Using a secured business credit card won’t erase the negative aspects of your personal credit, but it will help you establish good business credit.
Why Is it Important to Build Good Business Credit?
Your business credit history and your personal credit history are separate, but they do influence each other. Most business credit cards will require you to personally guarantee the card, which means that if your business can’t pay the card balance, you are personally required to pay. To establish this personal guarantee, the credit card issuer will look at your personal credit score.
If your business is new or if you have a spotty business credit history, it’s important to establish good business credit. Establishing or improving your business credit allows you to access more credit and funding, which is crucial to growing your business. It also allows you to sell your company more easily, as your business credit score transfers with your business. As you improve your business credit, you’ll be eligible to apply for loans with more reasonable interest rates, ensuring that you always have access to the funding you need.
How to Apply for a Secured Business Credit Card
The first step in applying for a secured business credit card is making sure you need one. If you don’t know your business credit score, you may want to start with finding it out. Unfortunately, there is no free way to obtain your business credit score. You need to go to the website of the business credit reporting agency and pay for a report.
There is one exception, though. You are entitled to a free copy of your business credit report if you are turned down for a business credit card or loan. You will receive a letter that explains why you were not approved and what steps you need to take to obtain a copy of your report.
Once you have your score and report, review it carefully and make sure there are no errors. If you see errors, you will need to contact the reporting agency in writing. Correcting errors can help boost your business credit score.
Business credit scores are on a 1 to 100 scale, with 100 being the highest credit score possible. If you have a business credit score below 75, you may struggle to get unsecured business credit cards and loans. If this is the case, you may need a secured credit card.
What are the best secured credit cards? The best secured business credit card is one that has low or no annual fees and a low interest rate. You should also consider the amount of credit you can access. Some secured business cards have very low limits, while others let you deposit $100,000 or more. You can find secured business credit card options by doing an online search. You can also talk to your bank or credit union to see if they have any secured credit card options.
You should also look into the reputation of the card. If you see a company with a pattern of poor customer service, for example, you may want to steer clear. If reviewers mention being approved for an unsecured credit card, you should pay attention to how long that process took.
Once you’ve decided on a secured card, you will need to complete the application. Most institutions allow you to complete the application online. Some banks require an in-person visit, though. Before you apply online, you will need to gather your company’s information, including your employer identification number, your legal business name, address, and phone number and your annual revenue.
You will also need to provide your personal information, including your name and Social Security number. This is because you will be required to personally guarantee the account. You may also need to provide government identification, such as a passport or driver’s license.
If you’re applying for a secured credit card with a bank, you may also be required to open a checking or savings account before you can apply for a secured card. This is so you can transfer your deposit from your bank account to the secured card holding account.
If you’re approved, the credit card issuer will collect your deposit and issue your card. Once you have the card, you should treat it like a credit card, keeping it secure and making your payments on time and in full whenever possible.
Alternatives to Secured Business Credit Cards
If you don’t want a secured business credit card or if you’ve been declined for a secured business card, you have other options available. You can try applying for a low-limit unsecured business card. A $300 to $500 limit won’t do much for your business, but even a low limit will help rebuild your credit.
You may also want to talk to your bank or credit union. If you didn’t apply with them directly, they may be willing to assist you in obtaining a secured credit card.
You can also focus on rebuilding your personal credit by applying for a secured personal credit card with no credit check. These cards can have high fees, but they can help you rebuild your personal credit, which will improve your odds of being approved for business credit down the road.