As a small business owner, you probably have all sorts of great ideas about how to build your business into a thriving cash cow. But to get there, you may need to feed the cow. After all, “It takes money to make money” is not just a famous quote — it’s often a reality.
That’s why you might want to consider a secured business credit card. It’s a great way to build — or rebuild — your credit while driving your small business forward.
But what does “secured” mean? And how does it differ from a regular credit card? In this article, I’ll explain what a small business secured credit card is, walk you through some of the benefits, and talk about the best secured business credit card tips.
Let’s get moo’ving.
A secured business credit card functions like any other credit card except it’s typically backed by a cash deposit that you as the cardholder put down as collateral.
Think of it much like a security deposit that renters are usually required to provide landlords when signing an apartment lease. It stays in reserve in case it’s needed.
The same goes for business secured credit cards. The money you put down on the account gives the credit card lender security in case you can’t make payments.
With a secured credit card, the amount you put down as a deposit usually becomes your credit limit for your credit card. In some cases, your lender could extend a line of credit that’s greater than the deposit you’d put down as collateral. But maxing out isn’t what is important — building a healthy credit history is.
Let’s say you just finished up with a woodworking internship and you’re ready to strike out on your own. Furniture-making future, here you come!
Although you’ve already accumulated many of the carpentry tools you need to get started, you know you’ll need more as your skills progress. And although taking up residency in your parents’ garage is OK for now, you all agree it’s temporary. You dream of renting or owning a bigger, better workshop one day.
The thing you’ll most likely need to fulfill that dream? Good credit. Without it, getting a loan and using credit toward the purchase of more tools, equipment, and space can be difficult.
Don’t fret. If you can muster up even a couple hundred bucks, you can put it down as a security deposit in exchange for a credit limit.
If you pay your statement balance in full and on time every single month, it will help build a healthy credit score. A good credit score can better help you secure the resources needed to run and expand your business.
You might be wondering: If I need to put money down ahead of time on a secured business credit card, doesn’t that defeat the purpose of getting a credit card in the first place? Why not just use a debit card?
The answer is: debit cards are a fine, responsible way to make purchases, but they typically can’t help your credit rating.
Although you start off borrowing against yourself with a small business secured credit card, what you’re building is a healthy credit platform from which your business can spring forward in the future.
And that’s the whole point. Somewhere down the line, you may need a good sum of cash to hire new employees, purchase or lease work space, and invest in more expensive tools. You’ll probably need a loan for all of that.
A strong credit rating is critical to getting that loan. So is business insurance. Both can help a potential lender feel more confident when lending you the money.
If you’re interested in learning how the loan process works, we wrote a guide on how to get a small business loan. In it, we share a few tips that can help get your small business started or keep it running successfully.
And we can help with the insurance end of things, too. We work with leading insurance providers and can help you get insurance coverage quickly, easily, and affordably. You can even get a quote in less than 10 minutes if you start right now.
If you think a secured business credit card might be the way to go, then let’s keep going and take a deeper look at what it offers.
Just like regular credit cards, secured credit cards send your account data to credit bureaus. This means they are included in your credit report and can help you build stronger credit, as long as you consistently pay your balance on time each month.
Secured-card limits vary widely. With some providers, you may potentially find no maximum limits. The best business secured credit cards are worth shopping for, so take your time and compare multiple options.
Thanks to the upfront deposit you put down as collateral, the risk of defaulting on payments is less a concern for your lender.
Essentially, you’re risking your own money with a default, not theirs. That means your creditworthiness is a bit less important to them in that instance, which in turn means you can more easily get approved without a previous — or stellar — credit score.
Although it’s not as common as it is with regular credit cards, certain secured business credit cards offer similar perks, such as cash back.
Think about those benefits. If your card offers cash back, you could use it to offset other standard operating business expenses, such as your insurance policy.
For example, depending on your business and location, Simply Business can find general liability policies for as low as $19.58/mo.* If you use your business secured credit card to pay your premium, and your lender allows you to redeem your cash-back rewards for statement credits, then essentially that reward is reducing this type of business expense even more.
If you pay your secured credit card bill consistently and on time each month, your deposit will be returned. Even if you do default, all you’ve lost (assuming you don’t owe more than your deposit) is likely what you put into it at the start.
However, here’s something to keep in mind. Late payments on secured cards still negatively affect your credit. Moral of the story? Pay your bill on time.
For some, the ultimate goal of a secured business credit card is using it to improve your credit rating so you can transition to getting a regular credit card.
Basically, you’re taking one small step before making the bigger leap. The key to do that? Understand the tricks of the trade when it comes to maximizing the benefits of your secured credit card. Which leads us to the next section.
To reap the full rewards of a secured business credit card, consider these tips:
There’s no reason to go into debt when taking out a secured credit card. That defeats the whole purpose of establishing or building a good credit score.
Instead, look for a card that you can afford. Even just $200 down is enough to begin the process of establishing good credit.
The best way to build credit with a small business secured credit card? Practice these three habits:
If you do, your credit score will improve over time.
Technically, you can use your secured credit card for any type of purchase — business or personal. However, since the point of it is to practice good habits and show your creditworthiness, try using it only for business expenses.
Using it wisely means paying it off in full each month so you’re not charged interest.
Consider using the card at least once per month so your account shows regular activity.
Finally, don’t max it out. To help on that front, use it for small purchases that keep you well below your credit limit. A big part of your credit score is determined by something called “credit utilization,” or the amount of the available credit you’re using.
A general rule of thumb is to keep your usage under 30% of your credit limit.
Maybe you’re starting a business from scratch and are new to credit. Or maybe you’re starting over after a financial setback negatively affected your credit.
Whatever the case, if you’re struggling to get approved for a traditional credit card, don’t let that stop you from growing your business. There are ways around it. And a business secured credit card may be one of them.
The winning formula is fairly simple: Put down a deposit. Borrow against it. Pay it off in full. Then you’ll be well on your way to accessing the credit you might need to turn your business into the cash cow of your dreams.
*Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on January - March 2023 data of 10% of our total policies sold.
I went to college to be an accountant and graduated with a degree in creative writing. Words won out over numbers, but barely. All credit goes to my parents. Had they talked about anything other than banking at the dinner table growing up—and had they never bribed me with Pop-Tarts to read books, play with my Matchbox cars and quietly exercise my imagination—who knows where my left and right brain would be today.
Chris writes on a number of topics such as legal resources, small business taxes, and social media marketing.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.