When starting a new business as a sole proprietor, limited liability company or any other type of business, one thing is certain: You will need money to cover startup and operational costs and other financial needs. However, it can be challenging for a new business to qualify for a business credit card or loan without any business credit history or track record of financial success.
One way for a new business to build credit and obtain a credit card is by applying for a secured business credit card. This guide will explore secured business credit cards, their benefits and how they can help your new venture.
What is a secured business credit card?
A secured business credit card works just like a regular business credit card, except the borrower must provide a cash deposit as collateral upfront, usually for an amount equal to the total credit limit. This collateral guarantees the loan for the lender, making it easier for them to lend to newly established businesses.
When you apply for and open a secured business card, your monthly payments will be reported to the various credit bureaus, helping to establish the creditworthiness of your business. Gradually, the business will be eligible for other lending products, such as unsecured credit cards, business loans and lines of credit.
When opening a small-business credit card, you can use your Social Security number, which an issuer will use to check your personal credit report. Another way to open a business credit card is to apply for one using an employer identification number, which helps separate your business credit profile from your personal credit profile.
However, if you haven’t established your business credit history, you may struggle to qualify for unsecured business credit cards or some types of loans, a common hurdle for new businesses.
Related: Who qualifies for a business credit card?
How does a secured business credit card work?
As mentioned, a secured business credit card requires the cardholder to deposit a set amount of cash to secure the card, which will act as collateral. For example, if you want a $5,000 credit card limit, you will likely need to provide $5,000 upfront, which the lender will secure in a savings account or certificate of deposit that you can’t access.
Most secured business cards require a minimum deposit of $500. Once the card is established, you can use it to make purchases for your business and pay off the balance at the end of your billing statement cycle.
As you continue to use the card and make payments, your credit activity is reported to one or more business credit bureaus, which include Dun & Bradstreet, Experian and Equifax.
Responsible use of a secured business credit card requires timely payments and low credit utilization. These positive activities build your business credit score and increase your business’s creditworthiness.
Related: Building your business credit: 5 steps to success
Pros and cons of a secured business card
Before applying for a secured business credit card, here are some pros and cons to consider.
Pros
- Easy to qualify for
- Deposit as little as $500
- Many secured cards have no annual fee
- Additional employee cards may be available at no cost
Cons
- Have to provide a cash deposit upfront
- Most cards do not have a welcome offer
- Annual percentage rate is often higher than unsecured cards
Alternatives to secured business credit cards
While there are alternatives to secured credit cards, you may struggle to qualify for other credit products if you have a limited credit history. However, there are steps you can take to build credit. Consider opening a business bank account so creditors can view your revenue and expenses. You may eventually be offered an unsecured business credit card by keeping a secured credit card and a business checking account in good standing.
Another way to start establishing a business credit history is to register for a Dun & Bradstreet number. The DUNS number is a unique nine-digit identifier for your business and may be required from some grants and loan programs.
Related: The best business credit cards with no personal guarantee
Bottom line
A secured business credit card is an excellent way to establish a business credit history for those with limited or poor credit. However, despite being easier to obtain than an unsecured credit card, having to provide collateral can pose challenges for cash-strapped new businesses.
If you can maintain positive habits, such as paying your balance on time and keeping a low credit utilization ratio, you’ll build your business credit and be eligible for an unsecured card before long.
