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The entrepreneurial spirit is alive and well. In 2021 and 2022, Americans filed nearly 10.5 million applications to launch new businesses, the two highest years for new business applications ever recorded.
Whether you want to launch a new business or expand your current company, financing is a common problem for small business owners. Businesses typically need several years of revenue and established credit histories to qualify for financing; getting approved for an unsecured credit card or loan can be difficult without a strong business credit report.
Secured business credit cards are tools you can use to establish or rebuild your company’s credit, but they can have high fees and annual percentage rates (APRs).
What is a secured business credit card?
As a business owner, building a credit profile separate from your personal credit is critical for your company’s success. But small business credit card issuers and lenders will base their decisions on your business’s credit history; if you have yet to establish credit, you won’t qualify for traditional financing options, including unsecured business credit cards or loans. It’s a common issue for those building a business from the ground up.
“When we surveyed our network of business owners, access to capital was the number one challenge they faced,” said Matt Brewster, vice president of finance with Hello Alice, a financial technology company focused on the financial health of small business owners.
A secured business credit card helps you establish your company’s credit. By opening a secured card, you can practice good credit habits and improve your business’s creditworthiness. Over time, it may allow you to qualify for other types of credit, including unsecured cards or business loans.
If you’ve made credit mistakes in the past—such as missing payments to vendors or defaulting on a previous business loan—you can also use a business secured credit card to rebuild your company’s credit.
How do secured business credit cards work?
Secured business credit cards work similarly to secured consumer cards. Secured credit cards require the user to deposit cash to secure the card. You can use your card just like a traditional unsecured credit card; you can use it to purchase items in person and online.
Typically, business secured credit cards have credit limits equal to the security deposit amounts. Usually, the required deposit is at least $500.
As you use the card and make payments, the issuer reports your activity to one or more business credit bureaus. According to Greg Ott, CEO of Nav, a digital platform that connects small business owners to financing options, choosing a card that reports to the business credit bureaus is essential in building your credit history as a business.
“I think that [credit reporting] is the most important criteria for a secured business credit card,” Ott said. “They [business owners] need to make sure it reports to all three commercial credit bureaus—Experian, Dun and Bradstreet, and Equifax—because you never know which commercial credit bureau lenders and credit providers are going to be pulling or relying on.”
If you use the card responsibly and make all your payments on time, the issuer reports that activity to the bureaus. Consistent positive reports of positive account management help boost business credit scores and improve your business’s overall creditworthiness.
To get all of the benefits of the secured card, limit your card use. Keeping your balance low will improve your credit utilization, a significant factor in determining your business’s creditworthiness.
Secured business credit card pros and cons
If your business is new, getting a secured card can allow you to establish credit for your company. However, there are some significant drawbacks to keep in mind.
Pros
- Accepts new businesses and those with poor credit
- May offer rewards and bonuses
- May offer added insurance benefits
Cons
- High APRs
- Expensive fees
- Higher security deposit requirements
- Spending limit tied to deposit amount
Pros Explained
Accepts new businesses and those with poor credit
For most types of financing, such as unsecured small business credit cards or loans, your business typically needs an established credit history and several years of revenue. Otherwise, you won’t qualify for a line of credit or loan.
By contrast, secured cards are available to new businesses and businesses with troubled credit histories or no credit, and using the card can improve your company’s credit.
Potential to earn rewards and bonuses
You can qualify for signup bonuses and rewards with some business credit cards. If your card has a rewards program, you can earn points, miles or cash back on your business purchases.
May get added insurance benefits
Credit card benefits vary by card and issuer, but some business secured credit cards provide insurance coverage to cardholders. Depending on the card, you could qualify for trip accident insurance, emergency ticket replacement, baggage loss insurance, or auto rental collision coverage. For business owners who travel for work, those perks are advantageous.
Cons Explained
High APRs
Like unsecured cards, secured business credit cards charge interest on balances you carry over from the previous statement period.
Because secured business cards are geared towards startups and those with poor credit, they tend to have high annual percentage rates (APRs). In fact, the APRs on secured cards tend to be well above the national average for consumer credit cards.
However, you can avoid interest charges by paying off the card in full before the statement due date.
Expensive fees
In addition to a high APR, you may have to pay monthly or annual fees, late payment penalties, and foreign transaction fees. Over time, those fees can substantially drain your business’s finances.
However, not all cards charge all of those fees, so researching all of your options is essential.
“If you shop around, you could find cards with lower or no annual fees,” said Brewster. We’re proud to have no annual fee for our secured card [the Hello Alice Secured Mastercard] or unsecured card, which is somewhat unique.”
Relatively high deposit required
With a secured consumer card, deposits can be quite low; for example, some personal secured cards allow you to deposit as little as $49.
Credit card issuers typically require much larger deposits for secured business cards. In general, minimum deposits range between $500 and $2,000.
Spending limit tied to deposit amount
If you have an unsecured card, the issuer sets a credit limit based on your credit history and income. For instance, you could have a credit limit of $10,000 or more without a deposit, and you can use the card repeatedly until you reach the spending limit.
Secured cards work differently. Credit card issuers base your spending limit on your deposit amount. In most cases, the limit will match the deposit, but some issuers will set a higher limit, such as 110% of your deposit amount.
The card gives you the convenience of using a credit card for transactions, but it requires you to put down a significant amount of cash as a deposit. For new businesses and startups on shoestring budgets, tying up cash flow can be difficult, and your spending is limited to how much cash you can commit as a security deposit.
Alternatives to using a business secured credit card
For consumers with bad credit, there are several ways to rebuild your credit. But for business owners, options are sparse.
“There’s been a proliferation of new personal credit-building solutions,” Ott said. “But there’s not as much on the business credit side for helping a small business owner build a credit file.”
However, there are some ways to lay the foundation for a positive credit history and secure financing beyond secured cards:
Establish your company’s credit profile
According to Brewster, not separating business and personal finances is one of the most common hurdles facing small business owners.
“A lot of these folks [small business owners], sometimes they’re starting a business and still have other full-time or part-time jobs,” he said. “So they [their accounts] are just intermingled.”
Suppose you use your personal accounts for business expenses and income. In that case, financial institutions have no idea what expenses belong to your business, making it impossible to assess your business’s creditworthiness.
To begin establishing your business credit history, opening a designated business bank account is critical so that creditors have clear information about your revenue and expenses.
Next, register for a Dun & Bradstreet number (DUNS). The DUNS is a nine-digit identifier for your business; some grant and loan programs require businesses to provide one.
As with your personal credit report, it’s wise to check your business’s credit reports regularly, such as once or twice a year. You can request your business credit reports online from Dun & Bradstreet, Equifax, and Experian.
Apply for business grants
If you’re starting a business or looking to expand an existing company, you may be eligible for grants from non-profit organizations or corporations. For example, these are a small sampling of available grants:
- Hello Alice. Hello Alice offers the Small Business Growth Fund program and provides business owners with between $5,000 and $25,000 in grant funding to entrepreneurs.
- National Association for the Self-Employed (NASE). Each year, NASE awards grants valued up to $4,000 through its NASE Growth Grant program.
- U.S. Chamber of Commerce: Through the America’s Top Small Business program—an awards program recognizing the achievements of outstanding small businesses—businesses can win up to $25,000.
- Venmo: The Venmo Small Business Grant gives business openers up to $10,000 in grants, and it also provides award recipients mentorship from business leaders and social media promotions.
Contact your local chamber of commerce or search Grants.gov to find grant opportunities for your business. You can also contact your local Small Business Development Center (SBDC), which can advise you on securing capital, marketing your business and even developing business plans.
Consider a microloan
If you want to build your credit but want another option besides a secured credit card, a microloan may be another tool you can use.
Non-profit organizations, such as Community Development Financial Institutions (CDFIs), usually offer microloans. The loans are for relatively small amounts, such as $500 to $50,000, and they often have less stringent credit and income requirements than traditional business financing options.
You can use the Community Development Financial Institution Fund’s award locator tool to find programs in your state.
The takeaway
As a small business owner, securing financing is one of your most difficult challenges. You’re unlikely to qualify for most business loans or credit cards without established credit—that’s where secured business credit cards can help. However, they do have their limitations.
“This is not going to be a card you’re going to be able to use for all your business expenses,” cautioned Brewster. “So it’s important to think of it for what it is: a credit building tool that… you can use for financing some portion of your business expenses.”
To take advantage of a secured business credit card and maximize the card’s effectiveness, limit spending to about 10% of your credit limit. Keeping your credit utilization low and making on-time payments will positively impact your business’s credit. Then, you could “graduate” to a traditional unsecured business credit card or a business card with perks like cash back rewards, which may offer more competitive rates and terms.
