Secured business credit cards are tools you can use to build credit for your business. But like any tool you need to learn as much as you can before you start using it. If you started using a chainsaw without knowing how it works you could hurt yourself. Using credit cards to build your companies credit is no different.
Before you apply, here are a few thinks that you need to know.
*Cash Deposit
Secured business credit cards use a cash deposit as collateral for your line of credit. You open a special savings account, and the amount you deposit in it becomes your line of credit. Some cards will only allow you to go up to a certain amount, say $500, while others will let you credit as much as you deposit or increase your credit limit without needing an additional cash deposit. Be sure to ask what their policy is.
You also need to consider how much of your companies capital you want tied up in the savings account. While it may be an ego boost to say you have a $5k limit on your corporate credit card, this just means that $5k of your companies money is tied up
* Annual Fee
All secured business credit cards charge an annual fee, but they vary. Make sure you ask what the fee is, and compare several cards. Also, look for a card with no application fee and no other required fees, such as monthly insurance policies.
*Credit Bureau Reporting
The idea in getting a secured business credit card is that you can use it to improve your company credit rating. So it won’t do you any good if it doesn’t report to the major credit bureaus. Even if it does report, if they flag your card as secured it could be a strike against you. Ask lenders who they report to, and if they specify what type of card they are reporting on. You may have to push to get this information from them but be sure to get it as this is a vital part of the process.
*Interest Rates
You have to understand that secured business credit cards tend to have higher interest rates than regular cards. The credit card company’s are dealing with an unknown quantity (you) and that carries increased risk. They balance this risk by hoping for more profits from the increased interest rates.
Because the cards are meant to be used solely for the long term purpose of building credit, you don’t want to carry a balance. Plan to pay your card off each month, and the higher interest rates won’t be detrimental. Still, ask around and compare rates.
Finally, ask if there is a set amount of time you have to keep the secured card before you can apply for an unsecured card. Usually, your lender will qualify you for a regular card after about a year of responsible use.