Getting a business loan or a business credit card can be tough if you don’t have great business credit scores.
One option to help you build your business credit is a secured business credit card. Using secured business credit cards responsibly and paying your bills on time can help improve your business credit scores and potentially open up more funding options down the line.
Secured credit cards require a deposit to get started. The deposit typically sets the credit limit and acts as collateral for the lender. As you use the card, you can work on building your credit history by making on-time payments and demonstrating responsible credit use over time.
How do business credit cards work?
There are both secured and unsecured business credit cards. “Traditional” business credit cards are unsecured, meaning they’re not backed by any collateral. In contrast, a secured business credit card is backed by a security deposit. In general, the dollar amount you deposit, or part of it, serves as your credit line with secured cards.
Secured credit cards are designed for people with poor credit or very little credit history. The deposit protects the card issuer in case of default and responsible use of the card can help the cardholder establish and build their credit history.
Business credit cards are designed for business expenses. In other words, you wouldn’t pay for groceries with a business credit card, but you might pay for dinner with a client or new software to help run your business.
When applying for a business credit card, your business credit will play a role. Your personal credit may also be a factor. If your overall credit history doesn’t meet the requirements for an unsecured business credit card, then applying for a secured business credit card may be a good option.
Pros and cons of secured business credit cards
Secured business credit cards are designed for business owners who may need to build or establish their business credit before they can qualify for other funding options. It may be a good option for small-business owners who are ineligible for an unsecured card, but it’s a good idea to keep some pros and cons of secured business credit cards in mind.
Pros
- May help you establish or build your credit
- May help you track your business expenses in one place
- May have credit card perks or rewards
Cons
- You must have money upfront to pay for the security deposit
- May have lower credit limits than traditional unsecured cards
- As with unsecured cards, may have an annual fee
Bottom line
Getting a secured business credit card could be a great step as you work on building your business credit or personal credit. To get the most out of it, make sure you get the right card for you and your business. Be sure to read the terms and conditions. Look for annual fees and deposit minimums.
If you’re approved for a secured business credit card, start using it and make all of your payments on time and in full to help build your credit history. On top of that, strive to keep your credit utilization ratio — or how much of your available credit you’re using at any one time — less than 30%.
Picking the right card and using it responsibly may help you get on the path to better credit, which can open more doors for your business.