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Credit cards are a very important part of running a business. Not only do they help business owners build their credit scores, but they can help you secure the assets you need to run your business. For businesses that do not qualify for a traditional business credit card, secured credit cards are a good option to build business credit.
How do Secured Business Credit Cards Work?
Business credit cards are different from consumer credit cards because they are designed specifically for business expenses. These credit cards require the payment of a refundable deposit before an account can be created. Keep in mind that this security deposit is only used if card owners default on their account.
Unlike standard credit cards, you do not need to have good credit to qualify. These credit cards are actually designed for business owners who do not have good credit or have a weak credit history.
Similar to other credit cards, these cards allow you to access balance transfers and cash advances (sometimes with high fees). You will also receive monthly statements with regular required payments.
Secured business credit cards are beneficial in that they are helpful for building–or rebuilding–personal and business credit. In addition, maintaining a low balance allows you to build credit, while paying the credit card on time helps you qualify for an unsecured business credit card in the future.
In fact, it is important to keep credit utilization below 20 percent of your credit limit because when your balance is close to your credit limit, your credit scores can be negatively impacted.
While there are numerous advantages to having these cards, the negatives associated with this card include high interest rates, a low credit limit initially, and the possibility of quickly maxing out the card, due to the low credit limit.
What Should I Look for in a Secured Credit Card?
A card’s benefits, fees, and rewards programs are all critical when choosing a card. Be sure to always examine the following:
–minimum and maximum security deposits
–interest rates
–annual fees
–rewards point perks, such as cash back options
What are the Secured Business and Personal Credit Card Options?
There are several different credit card options available. It is helpful to access your personal and business credit scores from the credit bureaus to determine what you qualify for. Some of these credit card issuers include the following:
–First National Bank Business Edition Secured Visa Card
–Wells Fargo Business Secured Credit Card
–Union Bank Business Secured Visa Credit Card
–Citi Secured Mastercard
–Platinum Secured from Capital One
How does the Credit Card’s Security Deposit Work?
While each lender has their own security deposit rules, most require about $300 to $500, which will become your line of credit. The reason for requiring this deposit is so that the credit card company can secure funds and lower its risk.
While some business owners may think of this as a prepaid credit card, that is false. In fact, the lender holds your deposit in a Federal Deposit Insurance Corporation (FDIC) insured bank account and requires the cardholder to make payments separate from the security deposit.
Sometimes, the business owner will receive the deposit once the account is closed–and if the account is in good standing with a zero balance at the time of closing. Other times, lenders may convert your secured credit card to an unsecured credit card and return your deposit—if you have maintained a history of on-time payments and low balances.
Because this is not an automatic process, you may need to advocate for yourself and ask the credit card company to consider converting your card to an unsecured business credit card due to your rising credit scores.
While business owners may have access to many different financing options—such as small-business loans or professional lines of credit—it can sometimes be more difficult to get financing with bad personal credit report. As a result, for entrepreneurs who commonly wonder how they can get their business off the ground without good credit, a secured credit card can be the answer.
Get started by forming your business online. Then we can work with you to establish and build your business credit. We’re here to answer your questions and guide your business to success. Form your free LLC today!
