Business owners usually have no difficulty achieving unsecured credit lines with suppliers. But, while many vendors and suppliers allow Net 30 terms to their customers, unsecured credit cards can be difficult for some business owners, especially those who have poor personal credit. For these business owners, a secured corporate credit card may be just the ticket.
A secured credit card uses money you place in a security deposit account as collateral, such as a certificate of deposit or savings account at your bank. Your credit line will generally depend upon your income, your ability to pay against your purchases, and the amount of your collateral deposit.
A secured credit card is not like a prepaid card. Your purchases are not paid out of your original deposit as they would be with a prepaid card. Your collateral deposit is just that, collateral being held as security in case you don't keep up with your payments. It provides the bank or underwriter confidence that you will make responsible payments.
Secured credit cards have long been used to help build stronger personal credit for those who have poor or no credit history. The business side of this strategy can help small business owners strengthen their business credit the same way, by proving responsible payment habits with major banks and lending sources who report automatically to D&B or the other business credit bureaus.
In business, secured credit cards work just like a traditional credit card. You can use it for everyday business expenses and purchases, as well as for other transactions, such as reserving a hotel room or renting a car. Since payments report to the commercial bureaus just like they would on a normal credit card, they are also beneficial for those who can’t get a small business loan due to a lack of credit history. Every payment made on-time provides a necessary boost to scores and ratings.
Secured cards are usually easy to qualify for, and some offer rewards, liability protection, overdraft protection, and the option of having multiple employee cards attached to the account.
Depending on the provider, your prompt payment habits can often result in the card being switched to an unsecured card after 6-12 months of on-time payments. In this case, your deposit will be returned, the secured account closed, and then a new unsecured account opened.
While business owners can use good personal credit to secure a business credit card, the goal is for your personal credit to not be tied to the business. It is not uncommon, but personally secured credit usually does not get reported to the D&B file. In addition, if you use your personal funds to pay your business debt, it crosses an invisible line that prohibits the transaction from being reported to the business credit file.
D&B is very careful to separate commercial credit from consumer credit, and personally secured credit cards usually fall under consumer credit restrictions. To avoid having to comply with the restrictions applied under the Fair Credit Reporting Act, D&B only accepts reporting of non-personally guaranteed commercial credit. This invisible line is part of the reason they can maintain the strict anonymity of their reporting partners.
Secured business credit cards can help develop strong financial habits. By making on-time payments and maintaining a low balance, you'll be rewarded with stronger business credit scores, improving your chance to not only be approved for small business loans or lines of credit, but to be in a position where the lenders actually come to you with offers.
Secured business-based credit cards also help to keep your personal and business income and expenses separate, which provides security over the long run. Should you someday be sued, evidence that your business and personal funds are professionally separated can help to keep your personal assets safe.
Along with the benefits, there are also risks. Unlike a prepaid credit card, you will have a bill to pay each month. If you don't feel comfortable with your current ability to handle that financial responsibility, a secured card may not be the right choice for you.
Just like traditional credit cards, secured business credit cards charge interest, and those high interest rates can come with additional fees, such as late fees if you make your payment even one day past due. They also charge annual fees of anywhere from $25 to $100, and they will charge over-limit fees and returned payment fees. Missed payments could initiate a higher penalty interest rate, and if you default on the card, you could lose your security deposit.
Here are a few suggestions:
Start with a lower-dollar value secured card to make sure this is the right fit for your business. Some alternative lenders start as low as $300 and some banks have a $500 minimum.
Read the fine print on several credit card offers, paying close attention to their fees, interest rates, and restrictions.
All transactions should be business related. This is not the card you want to use when buying ice cream for the kiddos, but rather for paying business expenses, such as fuel, advertising, vendor purchases, or car rental.
Work at not carrying a balance, since interest rates can make this cost-prohibitive if you can't pay the balance in full every month.
Never max out a secured card if you are working to build solid scores and ratings with the creditor. Start by using about 10% of the available funds, and never more than 20%.
Always make your payment on time, preferably 5-7 days before the due date to allow for processing time, and 12-14 days if you are mailing your payment.
Don't set up your payment as an auto-draft from your bank account. Even though it's tempting to do so, this is not recommended if you want your payment to carry more weight in the business credit file. Make your payment online, by phone, or by mail to get the greatest benefit.
Choose a card that reports to the bureaus. The best secured business credit cards are those that either directly report to the business credit bureaus or get reported through their underwriter.
Establish the secured card in the business name, using the same business address as it appears in your business credit report. While you may have to attach your personal name to the account, the account itself needs to be in the business name.
Be sure to make your payment from a business account that is registered in the business name and business address. If you pay this business expense with a personal card, it crosses that invisible line we discussed earlier.
If you have any questions about secured business credit cards and how they can benefit your credit scores, please feel free to reach out for more information. I'm here to help.