If your business cannot qualify for an unsecured business credit card, then secured business credit cards are an option. They can offer access to credit when you need it to help run your business, but there are some things you should know before getting it. Read on to find out how business credit cards work and whether they can be appropriate for your business.
What is a secured business credit card?
a safe Business credit card There is a card that needs collateral to open. This takes the form of a collateralized cash deposit, which may be equal to your initials. credit limit. Some secured cards base your limit on the deposit percentage instead.
The amount you deposit depends to a large extent on the card and your credit. Some cards set the minimum opening deposit at $ 49, while others may raise it to $ 200 or $ 500. In addition to the minimum initial deposit requirement, the card can cap how much you can deposit to secure a business credit card. Again, the boundaries may vary. At the high end, it is possible to find secure cards that allow you to deposit $ 25,000 or more.
Why Business Secure Cards Need a Deposit
The purpose of the deposit is to reduce the risk for the credit card company. If you were Default on a secured business credit card, The card issuer can hold deposits for any outstanding balance. If you default on an unsecured credit card, the lender will have to take Debt recovery proceedings Against you, which may include a lawsuit to recover the balance. It is time consuming and expensive; Secure cards allow the credit card company to avoid this.
How to get your deposit with a secured credit card
Some business Secure cards can return your initial deposit After a certain time period. For example, your deposit can be returned after you have paid for six consecutive months. At that time, your card will be considered unsecured.
Not all secure business card issuers offer unsecured cards over time. If your secured card has not been converted into an unsecured business card, you will usually get your deposit back after paying any outstanding balance on the card and closing the account.
Another option is that your issuer can keep your deposit but allows you to request an increase in your credit limit. Just keep in mind that to get a large credit line you may need to add money to your security amount.
Pros and Cons of Secured Business Credit Cards
There are many reasons why you might consider getting a secure business card.
Pro: access to a line of credit
If your business has not established credit and your personal credit score is not strong, getting approved for unsecured business cards can be challenging. Getting approved for a secure business card can be easy.
Pro: Building Credit History
Payment activity on secure business cards is usually reported to the credit bureaus. Some report only to the Business Credit Bureau, while others report on both of you Business and Personal Credit Report.
Activity on a secured business credit card can help you establish or re-establish a positive credit history. Pay on time every month and maintain low Credit usage Can help improve your credit score over time. A high score can then open up new business financing possibilities, like unsecured business cards, loans or loans.
Cindy Martini, president and CEO of Member Access Processing, an aggregator of card services for credit unions, says the simplest rule to create credit with secure cards is to keep it active. “Yes, you will have to deposit money, but a high, responsible use is a good sign for the issuer that you are ready for an unsecured card.”
While a secured credit card can help pay for your business Day to day expenses Or make a big purchase, there are some downsides to consider.
Con: Reduction in spending power
If the card issuer restricts your credit limit, you may not have the power to spend. When you can do your work to a higher limit through responsible use, the limit of a few hundred dollars may not be helpful in the short term.
Con: Collateral is on the line
If you fail to keep the payments, you risk losing your deposit. You may have no intention of defaulting, but if an unexpected downturn binds your business to cash flow, you may not have the money to pay. If the card issuer does not make an offer Difficulty program Or not ready to work on the payment plan you pay, you may end up defaulting and withholding the deposit. In addition, a business credit card usually requires one Personal guarantee, Whether it is a secure or unsecured card. This means that your personal loan is also at risk.
Con: High interest rate
A secured business credit card is designed for business owners with bad credit, so when you choose this option you are unlikely to have the lowest annual percentage rate available on the credit card. According to US News Research, The Average Minimum APR Business is about 14% for credit cards.
Can you get approved for a secured business credit card?
When you are shopping for a secured business credit card, consider whether it is the right type of card for your needs. Your score may be on the boundary between fair and poor. If you can increase your score by just a few, you can bypass a secured card altogether and get approved for an unsecured business credit card instead.
Evaluate the available cards and decide if features (such as rewards, no annual fees or high credit limits) are not important to you. If you are primarily interested in rewards, you want to further reduce the search by looking at secure cards with rewards programs that align with your business spending habits.
Pay attention to other details including interest rates, fees and benefits that may be helpful for your business. For example, your card may come with free credit monitoring or monthly credit score access. If you are working on increasing your score it can be useful in tracking your progress. Or it may come with other perks, such as a free employee card.
Evaluate how much cash you can offer as a deposit for a secured card, and compare how a minimum card requires different cards. Also, see if the card issuer allows you to increase your deposit or eventually convert your card to an unsecured account.
Compare options carefully
Before you sign on the dotted line for a secured business credit card, have a look at other financing routes that may be open to you.
For example, you might consider one Secured business loan Or a Personal loan secured Instead. You will still need to offer collateral for any type of loan, but in lieu of cash, you may be able to offer a tangible asset such as a business instrument or asset. Of course, the risk is that if you default on the loan, the lender will be able to keep your collateral as payment.
Before you commit to any financing, compare all options head-to-head with a secure business card or otherwise. Do not make random decisions:
- Interest rate and Fees
- Security or collateral requirements
- How much credit will you be able to access
- How Financing Can Affect Your Credit Score
- Why do you need financing