Secured business credit cards are an option if your business can’t qualify for an unsecured business credit card. They can offer access to credit when you need it to help run your business, but there are a few things you should know before getting one. Read on to learn how secured business credit cards work and whether they might be a good fit for your business.
[Read: Best Business Credit Cards.]
What Is a Secured Business Credit Card?
A secured business credit card is a card that requires collateral to open. This collateral takes the form of a cash deposit, which may be equal to your initial credit limit. Some secured cards base your limit on a percentage of the deposit instead.
The amount you’re required to deposit depends largely on the card and your creditworthiness. Some cards set the minimum opening deposit at $49, while others may increase that to $200 or $500. In addition to requiring a minimum opening deposit, the card may cap how much you can deposit to secure a business credit card. Again, the limits can vary. At the higher end, it’s possible to find secured cards that allow you to deposit $25,000 or more.
Why Business Secured Cards Require a Deposit
The purpose of the deposit is to reduce risk for the credit card company. If you were to default on a secured business credit card, the card issuer could keep the deposit to make up for any outstanding balance. If you default on an unsecured credit card, the lender would have to take debt collection actions against you, which could include suing you to recover the balance. That’s time-consuming and costly; secured cards allow the credit card company to avoid that.
How to Get Your Deposit Back From a Secured Credit Card
Some business secured cards may refund your initial deposit after a certain time period. For example, your deposit may be returned to you after you make six consecutive months of on-time payments. At that point, your card would be considered unsecured.
Not all secured business card issuers offer an unsecured card over time, however. If your secured card isn’t converted to an unsecured business card, you’ll generally receive your deposit back after repaying any outstanding balance on the card and closing the account.
Another alternative is that your issuer may keep your deposit but allow you to request incremental increases to your credit limit. Just keep in mind that you may need to add money to your security deposit to get a bigger credit line.
Pros and Cons of Secured Business Credit Cards
There are several reasons you might consider getting a secured business card.
Pro: Access to a line of credit
If your business doesn’t have established credit and your personal credit score isn’t strong either, getting approved for an unsecured business card may be challenging. It might be easier to get approved for a secured business card.
Pro: Building credit history
Payment activity on secured business cards is typically reported to credit bureaus. Some report only to business credit bureaus, while others report on both your business and personal credit reports.
Activity on a secured business credit card can help you to establish or reestablish positive credit history. Making payments on time every month and maintaining a low credit utilization could help to improve your credit score over time. A higher score can then open up new business financing possibilities like unsecured cards, lines of credit or loans.
Cyndie Martini, president and CEO of Member Access Processing, an aggregator of card services for credit unions, says the simplest rule for building credit with a secured card is to keep it active. “Yes, you’ll have to deposit money, but high, responsible usage is a good signal to the issuer that you’re ready for an unsecured card.”
[Read: Best Secured Credit Cards.]
While a secured credit card could help your business pay for day-to-day expenses or make larger purchases, there are some downsides to consider.
Con: Reduced spending power
You may not have much spending power if your card issuer restricts your credit limit. While you could work your way up to a higher limit through responsible use, a limit of just a few hundred dollars may not be that helpful in the short term.
Con: Collateral is on the line
You risk losing your deposit if you fail to keep up with the payments. You may not have any intention of defaulting, but if an unexpected downturn puts your business cash flow in a bind, you may not have the money to pay. If the card issuer doesn’t offer a hardship program or isn’t willing to work out a payment plan you can afford, you may end up in default and forfeit the deposit. Further, business credit cards typically require a personal guarantee, whether it’s a secured or unsecured card. That means your personal credit is at risk, too.
Con: High interest rates
A secured business credit card is designed for business owners with bad credit, so you’re not likely to get the lowest annual percentage rate available on a credit card when you choose this option. According to U.S. News research, the average minimum APR for business credit cards is about 14%.
Can You Get Approved for a Secured Business Credit Card?
When you’re shopping for a secured business credit card, consider whether it’s the right type of card for your needs. Your score may be on the border between fair and poor. If you could raise your score just a few points, you might bypass a secured card altogether and get approved for an unsecured business credit card instead.
Evaluate the available cards and decide what features (like rewards, no annual fee or a high credit limit) are important to you. If you’re interested primarily in rewards, you’d want to further narrow the search by looking at secured cards with rewards programs that align with your business spending habits.
Pay attention to other details, including the interest rates, fees and benefits the card might offer that could be helpful to your business. For instance, your card may come with free credit monitoring or monthly credit score access. That could be useful in tracking your progress if you’re working on increasing your score. Or it may come with other perks, such as free employee cards.
Assess how much cash you’re able to offer as a deposit for a secured card, and compare that with the minimums different cards require. Also, look at whether the card issuer allows you to increase your deposit or eventually convert your card to an unsecured account.
Compare the Alternatives Carefully
Before you sign on the dotted line for a secured business credit card, take a look at the other financing routes that may be open to you.
For example, you may consider a secured business loan or a secured personal loan instead. You’d still need to offer collateral for either type of loan, but in lieu of cash, you may be able to offer tangible assets like business equipment or property you own. The risk there, of course, is that if you default on the loan, the lender would be able to keep your collateral as payment.
Before you commit to any financing, secured business card or otherwise, compare all the options head to head. Don’t make a decision without considering:
— Interest rates and fees
— Security or collateral requirements
— How much credit you’ll be able to access
— How the financing may impact your credit score
— Why you need financing
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Update 02/16/21: This story was published at an earlier date and has been updated with new information.