When starting a new business as a sole proprietor, LLC, or any other type of business, one thing is certain: You will need money to cover start-up costs and operations as well as other financial needs. However, qualifying a new business can be challenging. business credit card or a loan without any business credit history or record of financial success.
One way for new businesses to build credit and get a credit card is to apply for a credit card. Secured business credit card. This guide will explore secured business credit cards, their benefits and how they can help your new business.
What is a secured business credit card?
A secured business credit card works just like one Regular business credit card, except that the borrower must provide a cash deposit up front as collateral, usually in an amount equal to the total credit limit. This collateral secures the loan for the lender, making it easier for them to lend to start-up businesses.
When you apply for and open a secured business card, your monthly payments will be reported to various credit bureaus, helping to establish the creditworthiness of your business. Over time, businesses will become eligible for other loan products, such as unsecured credit cards, business loans, and lines of credit.
When you open a small business credit card, you can use your Social Security number, which the issuer will use to check your personal credit report. Another way to open a business credit card is Apply for a job using your employer’s identification numberhelps separate your business credit profile from your personal credit profile.
However, if you haven’t established your business credit history, you may have difficulty qualifying for an unsecured business credit card or certain types of loans, a common obstacle for new businesses.
Related: Who is eligible for a business credit card?
How do secured business credit cards work?
As mentioned, secured business credit cards require the cardholder to deposit a certain amount of cash to secure the card, which will act as collateral. For example, if you want a credit card limit of $5,000, you may need to provide $5,000 up front, the amount the lender will secure in a savings account or certificate of deposit that you don’t want. accessible.
Most secured business cards require a minimum deposit of $500. Once the card is set up, you can use it to make purchases for your business and pay off the balance at the end of the transaction. billing statement cycle.
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As you continue to use your card and make payments, your credit activity will be reported to one or more Corporate credit bureauincluding Dun & Bradstreet, Experian and Equifax.
Responsible use of a secured business credit card requires timely payments and low credit utilization. These positive activities will build your business credit score and increase your business’s creditworthiness.
Related: Build your business credit: 5 steps to success
Pros and cons of guaranteed business cards
Before applying for a secured business credit card, here are some pros and cons to consider.
Advantage
- Easily qualified for
- Deposit at least $500
- Many secured cards have no annual fee
- Additional employee cards can be provided free of charge
Defect
- A cash deposit must be provided in advance
- Most cards do not have a welcome offer
- Annual percentage rate usually higher than unsecured cards
Alternatives to secured business credit cards
While there are alternatives to secured credit cards, you may have difficulty qualifying for other credit products if you have a limited credit history. However, there are steps you can take to credit building. Consider opening a business bank account so creditors can see your revenue and expenses. You may finally be offered an unsecured business credit card by keeping one Secured credit card and a business checking account in good standing.
Another way to start establishing a business credit history is to apply for a Dun & Bradstreet number. A DUNS number is a nine-digit identification number unique to your business and may be required from some grant and loan programs.
Related: The best business credit cards have no personal guarantees
Bottom line
Secured business credit cards are a great way to establish a business credit history for those with one limited or poor credit. However, although easier to obtain than an unsecured credit card, having to provide collateral can pose a challenge for cash-strapped new businesses.
If you can maintain positive habits, e.g Pay your balance on time And Maintain low credit utilization ratioYou’ll build your business credit and soon qualify for an unsecured card.
