Secured business credit cards might just be the solution to a conundrum that business owners find themselves in all too often. We’ll set the scene:
As a business owner, you’ve probably been told over and over that you need a business credit card to build and boost your credit.
Sounds great, right? Who doesn’t want to establish more credit history and a better score?
Well, let’s say you’re searching for the best business credit cards in the bunch and you find yourself in this bind: you need a business credit card to build your credit… But you don’t qualify for a business credit card because you don’t have sufficient credit history or your credit score is too low. Well, you’re not alone.
Business owners with bad personal credit or no credit history at all can easily find themselves in this catch-22. How can you get out of it?
That’s where secured business credit cards come in.
To help you figure out if they’re the right move for you and your business, here’s all you need to know about secured business credit cards.
Secured business credit cards are the perfect solution to help you establish or rebuild business credit. A secured business credit card is backed by a security deposit and generally functions like a normal business credit card. Read ahead for a deep dive into secured business credit cards, but in case you’re seeking a quick recommendation for the best secured business credit cards, see our top picks below:
Just as there are secured and unsecured business loans, there are secured and unsecured business credit cards.
And as you can imagine, unsecured business credit cards work differently than secured business credits.
Let’s run through what sets them apart.
When you think of a business credit card, you’re probably thinking of the unsecured type—that’s the most common type of credit card. In fact, secured business credit cards are kind of an anomaly.
When you take out an unsecured business credit card, you don’t have to put down a deposit as collateral for the card in case you can’t pay off your debt.
Giving out unsecured credit is a riskier deal for credit card companies, so they only approve cardholders with the best personal credit scores. If you have a great credit score, credit card issuers will be confident that you’re trustworthy and that you’ll pay them back.
All in all, unsecured business credit cards are tough to qualify for. If you have a less-than-stellar credit score—or no credit history at all—you might want to consider secured business credit cards instead.
On the other end of the spectrum, you have secured business credit cards.
With secured business credit cards, cardholders need to put down a refundable cash deposit for collateral. That’s so that, in the event that you default on your credit card payments, the credit card issuer can use the deposit you made to repay your debt.
In the end, the deposit on a secured business credit card just limits the credit card company’s risk—meaning they’re way more likely to approve business owners with bad or insufficient credit.
When you’re approved for a secured business credit card, you make your refundable security deposit into a savings account. You’re then given a credit limit—typically set at 90% to 100% of your deposit.
Once you’ve put your deposit down and the credit card company has set your credit limit, you can use your secured business credit card just like you’d use an unsecured one. They’re accepted anywhere an unsecured business credit card would be, so you don’t have to worry about where you can and can’t use it.
And just like any other business credit card, secured business credit cards incur interest if you don’t pay your balance off in time.
Now for the million dollar question—when should you consider using secured business credit cards?
Here are a couple reasons why a business owner would apply for secured business credit cards:
If you have a less-than-stellar credit score or limited credit history, a great way to fix that is to take out a business credit card.
Sounds great in theory, but remember that paradox we were talking about earlier?
Business owners who need business credit cards but don’t qualify because of their credit scores should consider secured business credit cards instead.
With a secured business credit card, you’re taking on the financial risk instead of the credit card company. Because of this, business owners with poor credit ratings are more likely to qualify.
Secured business credit cards are also a good fit for business owners who don’t have any credit history at all.
Credit card companies won’t approve business owners for unsecured credit without seeing any established credit history. But with secured business credit cards, there’s little to no risk on the credit card company’s end.
As long as the secured business credit card issuer reports to the credit bureaus, you’ll have established your business credit history. And if you stay on top of your credit card repayments and keep a low card balance, you’re well on your way to building a great credit score.
One thing to consider with secured business credit cards, though:
These credit cards are great for building your credit history from scratch. But they aren’t as effective for rebuilding credit history as people think they are.
Some people take out secured business credit cards to quickly rebound from a financial disaster—like a bankruptcy. But if you have a poor credit report and a bad credit score to show for it, adding a secured business credit card into your mix of credit probably won’t do all that much for you. If you have a lot of black marks on your credit report, just adding one good account isn’t a silver bullet solution for re-establishing good credit.
Secured business credit cards can be a great solution for business owners who don’t qualify for their unsecured counterparts.
But here are few things to be wary of with secured business credit cards:
Like unsecured business credit cards, secured business credit cards come with interest rates and additional fees—like application fees, late-payment fees, annual fees, over-limit fees, and returned-payment fees.
If you miss a payment, you might trigger a penalty interest rate. A secured business credit card is the perfect opportunity to establish a good credit history… But if you aren’t responsible with your repayments, you’ll be charged for it and your credit score will still suffer.
With secured business credit cards, business owners have to put down a sizable amount of money as a deposit. If you practice good borrowing habits, nothing will happen to that deposit. However, if you default on your repayments, the credit card company has the right to seize your entire deposit.
In the end, secured business credit cards are better than no business credit card at all, but you need to consider the downsides. Secured business credit cards can be a great stepping stone to help you build your credit history and learn good borrowing habits.
That being said, secured business credit cards tend to come with annual fees and higher interest rates—so once you’re eligible for an unsecured business credit card, consider making the switch.
A few of the major credit card issuers offer secured business credit cards. And while there’s no perfect formula for finding the right secured business credit card for you, you’ll want to look carefully at the interest rates and fees associated with each of the cards offered.
With no minimum credit, flexible security deposit, and no annual fee, The Capital One Secured Mastercard is one of our favorite secured cards to help you build credit. Although the Capital One Secured Mastercard is a personal credit card it will still help you build up your credit history so you can apply for an unsecured business card or business loan down the line.
Unlike unsecured business cards, not many secured business credit cards offer rewards earnings when you use the card. However, check out the Wells Fargo Business Secured Credit Card to find a secured card that helps you build your credit while earning rewards. (Enrolling in the rewards program will cost you $50 per year, though.)
And finally, make sure that your secured business credit card reports to the credit bureaus. The only way a secured business credit card will help you build your credit is if the issuer reports your payments and other borrowing behavior to the credit reporting bureaus.
If your credit rating isn’t where you want it to be—or it’s totally nonexistent—secured business credit cards could offer a solution for your small business.
If you do choose to use this type of business credit card, follow these best practices:
Use these tips to make the most of your unsecured business credit card and, when you’re ready, graduate to a better option!