What is a secured business credit card?

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What is a secured business credit card?

A secured card is a type of business credit card that requires a cash deposit as collateral, which serves as the card’s credit limit. This type of card is often used by businesses that are new, have limited credit history, or are working to improve their credit.

In this article, Ramp covers how secured business credit cards work, their benefits, and how to get a secured card for your business.

How do secured business credit cards work?

Secured business credit cards function by requiring the cardholder to make an initial cash deposit, which directly determines the card’s credit limit. For example, a $1,000 deposit would typically allow for a $1,000 line of credit. Unlike prepaid cards, secured credit cards provide actual credit, allowing businesses to make purchases up to the credit limit and pay the balance down monthly, similar to traditional credit cards.

When a business uses a secured credit card responsibly, by making timely payments and keeping balances low, it reflects positively on the business’ credit report. Over time, this responsible usage can help improve your business credit score, making it easier to qualify for larger, unsecured lines of credit.

Many credit card issuers also offer the opportunity to upgrade to an unsecured card after a period of demonstrated financial responsibility, which can further enhance the business’s credit options and financial flexibility.

How do secured business credit cards work?

A secured business credit card has a number of benefits:

• Using a secured loan or credit card can rebuild your business credit score.
• Startups and small businesses may not have a sufficient credit history, so using secured credit cards can help establish a credit history.
• Employees may be added to the account to make purchases for the business.
• Similar to regular business credit cards, secured cards may have rewards.

Limitations of a secured business credit card

While secured business credit cards can help build credit, they also come with important limitations to consider:

• The upfront security deposit (typically $500-$5,000 or more) freezes your working capital when your business might need it for growth opportunities.
• Your credit limit is typically capped at your security deposit amount, limiting your purchasing power for larger business expenses.
• Despite requiring collateral, these cards often charge higher interest rates (frequently over 20% APR) and additional fees (annual, maintenance, employee card fees, etc.).
• Rewards programs, if available, offer minimal returns compared to unsecured cards, with few sign-up bonuses and limited business management tools.

Can you use a secured business credit card for personal use?

While it’s not illegal to use a secured business credit card for personal expenses, it will likely violate the terms and conditions of your card agreement. This can come with some serious consequences, like penalties, the loss of certain benefits like reward points earned on business expenses, or cancellation of the card.

Moreover, in the case of an LLC or a corporation, using a business credit card for personal expenses can undermine the legal separation between the business and the individual. This separation is crucial for maintaining limited liability status, and breaching it could expose personal assets to business liabilities.

How to get a secured business credit card

Here are the typical steps to apply for a business credit card.

Research potential card issuers

Begin by identifying credit card issuers that offer secured business credit cards so that you can compare their terms. Look for cards with no annual fees or foreign transaction fees, good rewards programs, and relatively low APR or 0% introductory APR.

Check credit reporting practices

Confirm that the issuer reports to business credit bureaus such as Experian Business, Equifax Small Business, and Dun & Bradstreet. Regular reporting is crucial as it makes sure that your business’ credit activities are accurately reflected in its credit reports, helping you build a strong credit profile.

Gather required documentation

Prepare necessary documents that may include business financial statements, tax identification numbers, business licenses, and personal identification. Having these documents ready can streamline the application process.

Complete the application

Apply for the card either online or in person, depending on the issuer’s process. Provide accurate information about your business and personal finances as required. This step typically involves detailing your business’s financial health and demonstrating the stability and legality of your operation.

Submit your security deposit

Once approved, you’ll need to pay a security deposit. This deposit sets your credit limit and is held by the credit card issuer as collateral against your spending. Make sure the deposit amount is within your budget while still providing enough credit to be useful for business expenses.

Activate and manage your card

After your account is set up and your card is received, activate it following the issuer’s instructions. Start using your card for business-related expenses. It’s crucial to manage the card responsibly by making on-time payments and keeping balances low relative to your credit limit. This will help you improve your credit score and qualify for an unsecured credit card in the future.

This story was produced by Ramp and reviewed and distributed by Stacker.