In recent years, the entrepreneurial spirit has thrived, with record-breaking numbers of Americans filing applications to start new businesses in 2021 and 2022.
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However, financing remains a common challenge for small business owners, as traditional lending often requires years of revenue and an established credit history. This can make securing unsecured credit cards or loans difficult for those without a robust business credit report.
Enter Secured Business Credit Cards: Building Blocks of Business Credit
Secured business credit cards, despite their potential for high fees and annual percentage rates (APRs), offer a valuable tool for constructing or reconstructing your company’s credit profile. They hold the key to unlocking access to other types of credit in the future.
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Demystifying the Secured Business Credit Card .
For business owners, establishing a distinct credit profile for your company is pivotal for its success. However, most small business credit card issuers and lenders rely on your business’s credit history when making lending decisions. Without a credit track record, accessing conventional financing options becomes an uphill battle—a common hurdle for entrepreneurs launching businesses from scratch.
Matt Brewster, vice president of finance at Hello Alice, a financial technology company tailored to small business owners, underscores that access to capital is the primary challenge facing many business owners.
Secured business credit cards offer a solution by enabling you to nurture your company’s credit. By obtaining such a card, you can cultivate responsible credit management practices, elevate your business’s creditworthiness, and ultimately qualify for unsecured credit cards and business loans.
Furthermore, if your business has previously grappled with credit setbacks, such as missed vendor payments or defaults on prior business loans, a secured business credit card serves as a valuable tool for rejuvenating your company’s creditworthiness.
Unpacking How Secured Business Credit Cards Operate .
Secured business credit cards operate akin to their consumer counterparts. To acquire a secured card, users are obliged to provide a cash deposit, which functions as collateral. Subsequently, you can use the secured card for both in-person and online transactions, mirroring the functionality of a traditional unsecured credit card.
Typically, the credit limit on a secured business credit card corresponds to the amount of the security deposit, commencing at a minimum of $500. As you judiciously use the card and make prompt payments, the issuer diligently reports your activity to one or more business credit bureaus.
Greg Ott, CEO of Nav—a digital platform that connects small business owners with financing options—emphasizes the paramount importance of selecting a card that reports to business credit bureaus. Ott highlights that reporting to all three major commercial credit bureaus—Experian, Dun and Bradstreet, and Equifax—is critical, as distinct lenders and credit providers may refer to different bureaus.
Maintaining prudent card usage, including punctual payments and maintaining low balances, contributes to favorable reporting to the bureaus. Consistent positive reporting contributes to the enhancement of your business credit scores and bolsters your business’s overall creditworthiness.
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Weighing the Pros and Cons of Secured Business Credit Cards .
Secured business credit cards present both advantages and disadvantages, especially for nascent businesses. Here’s a succinct overview of the salient aspects to consider:
- Accessibility for new businesses and those with less-than-stellar credit
- Potential for rewards and bonuses
- Supplementary insurance benefits
- Elevated APRs
- Incurrence of costly fees
- Heightened security deposit requirements
- Spending limit tethered to the deposit amount
Secured business credit cards can be potent tools for cultivating or rejuvenating your business’s credit, especially if you’re embarking on your entrepreneurial journey or have grappled with credit challenges. However, it’s imperative to weigh these benefits against the associated costs, encompassing high APRs and fees, to make a discerning decision aligned with your business’s financial objectives and requisites.