Using Secured Business Credit Cards to Reestablish Creditworthiness

Establishing or reestablishing credit can be a challenge, especially for small business owners. Secured business credit cards provide an effective tool to build your business credit profile when traditional credit options aren’t available. Let’s explore what secured cards are, how they work, their pros and cons, and some of the top secured business card options to consider.

What Are Secured Business Credit Cards?

Secured credit cards require an upfront security deposit that acts as collateral against the credit limit you receive. The deposit amount equals the credit limit – put down $500 and you get a $500 limit. The card issuer holds onto the deposit in a separate account to secure the line of credit being extended.

This differs from traditional “unsecured” cards where no deposit is required. Issuers rely on your creditworthiness alone when approving your application and setting a credit limit.

Secured card programs are designed specifically for applicants with limited credit histories – like startups or entrepreneurs looking to establish business credit – or those with credit challenges. The cards provide access to credit despite poor or no credit, while helping to build positive payment histories.

It’s important to note that while these cards extend credit to riskier applicants, they tend to charge higher interest rates and fees. We’ll cover more details shortly.

How Secured Business Cards Help Build Credit

Using a secured card properly helps establish positive credit references and improve your personal and business credit scores over time.

Most secured business card issuers report your payment activity to consumer and/or commercial credit bureaus. This includes on-time payments, credit utilization, and more. With responsible use – think paying your balance off monthly – this reporting will help strengthen your credit profiles.

Many secured card programs also allow you to graduate to an unsecured card. After making on-time payments for a certain period, usually around 12 months, issuers may refund your security deposit and upgrade your account – or they may simply convert your deposited funds into available credit on the card.

Graduating to an unsecured account is a great way to continue building your business credit with larger credit limits and better terms.

Major Pros of Secured Business Credit Cards

There are several advantages to using secured cards, including:

Access to credit – Secured cards allow applicants with poor/no credit to qualify for a line of credit to help fund their business.

Build business credit – Responsible card use means positive reporting to commercial credit bureaus like Dun & Bradstreet. This helps establish a business credit file and improve your company’s PAYDEX score over time.

Improve personal credit – Many secured business cards also report to consumer credit bureaus. Making on-time payments helps boost your personal credit scores.

Graduate to better terms – Issuers may upgrade your account to an unsecured card with larger limits and improved pricing after demonstrating responsible behavior.

Peace of mind – Some secured cards offer $0 fraud liability protections against unauthorized charges. This ensures business owners aren’t responsible for fraudulent card activity.

Potential cash back rewards – Certain secured cards offer the ability to earn cash back or rewards on purchases. This allows cardholders to offset some costs.

The Downsides of Secured Business Credit Cards

While secured cards provide easier access to credit, there are some drawbacks to consider as well:

Opportunity cost of funds – Tying up your hard-earned capital as a security deposit means losing out on investing or using those funds for other business needs.

Higher costs – Secured cards tend to charge annual fees, higher interest rates, and additional maintenance fees relative to traditional credit cards. This cuts into potential savings.

Lower initial limits – Your credit limit equals the amount of your security deposit, so initial spending power is lower compared to unsecured cards. Limits often start around $200.

Security deposit at risk – Failure to make minimum payments may lead the issuer to keep some or all of your security deposit funds. Be sure to make payments on time.

May not graduate – Meeting issuer guidelines around timely payments does not guarantee upgrading to an unsecured account. Make sure to understand any graduation policies.

Top Secured Business Credit Card Options

Now that we’ve covered the basics of secured cards, let’s look at some of the top options on the market today:

Wells Fargo Business Secured Credit Card – This card offers a competitive cash rewards program, reporting to consumer and commercial credit bureaus, $0 fraud liability, and Cell Phone Protection. There is a $25 annual fee.

Capital One Spark Secured Mastercard – Features 2% cash back on all purchases with strong reporting to both personal and business credit agencies. No annual fee.

First National Bank Business Edition Secured Card – Puts down $200 to get a $200 initial credit line. Enjoy peace of mind with $0 fraud liability protections and opportunities to earn back your security deposit.

Brex Card – Technically not secured but doesn’t require a personal credit check. Great for startups looking to build business credit and take advantage of 60 days interest-free financing on purchases.

Be sure to read the fine print around fees, graduation requirements, and other terms before applying to make sure it’s the right fit.

Final Thoughts

Establishing business credit is crucial for any entrepreneur – it helps unlock more financing options, negotiate better terms from vendors, and demonstrate credibility to customers down the line.

While secured credit cards require tying up operating capital temporarily and charge higher fees, they can kickstart your credit building journey when no other options exist. Use them strategically and responsibly to lay the foundation for long-term business creditworthiness.

The key is graduating to an unsecured card with better rates and rewards. This process may take 6-12 months of consecutive on-time payments. Stay focused on this end goal and you’ll be in a much stronger financial position over time.