Business credit can open doors to financing, better vendor terms, and valuable partnerships. But how can you build it? If you have a legally registered business, an EIN, and a business bank account, you’re ready to get started. From there, you need to establish your first tradeline, a record on your business credit report that shows whether you’re making monthly payments on time. While there are a few ways to do that, secured credit cards offer a great entry point.
What are secured business credit cards?
A secured business credit card is a credit card that allows for the financing of business purchases after you’ve put down a deposit (collateral for the credit line). The credit line is typically equal to the deposit amount you provide. For example, if you put down $5,000, you’d get access to a $5,000 credit line. You can then use the card to make business purchases as you would with a regular, unsecured business credit card.
Once you start using a secured business credit card, you’ll receive a statement each month that lists your purchases, balance, and minimum payment amount. While you’re only required to make the minimum payment each month, carrying a balance beyond the payment due date will lead to the accrual of interest charges. A high credit utilization ratio on a business credit card can also hurt your business credit.
To build your business credit as quickly as possible with a secured business credit card, it’s best to make all your payments on time and keep your outstanding balance below 30%. In some cases, card providers will refund your deposit after a certain period of responsible use, allowing you to graduate to an unsecured card. However, if you miss payments and default on the card, the provider can use your deposit to cover the amount you owe.
Key benefits of secured business credit cards
Secured business credit cards offer various notable benefits, including:
- Grace period: You won’t pay interest on purchases if you pay them off in full by the payment due date following the close of the billing cycle.
- Minimum payment: If you need to carry a balance beyond a billing cycle, you can. Card providers only require you to make a small minimum payment each month.
- Possible deposit refund: Some card providers will refund the deposit after a certain period of responsible use, and may offer credit line increases.
- Builds credit history: If the card provider reports to one or more business credit bureaus, the card can help you establish a credit file and, if you make your payments on time, help you build a positive business tradeline.
- Rewards: Some secured cards let you earn points, cash back, or other perks on your business spending.
- Benefits: Cards may also offer extra features like fraud protection, virtual card numbers, and employee cards with customized spending limits.
If you can’t get approved for an unsecured business loan or credit line, secured business credit cards offer a helpful entry point to business credit. While you will have to deposit collateral to gain access to a credit line, it can help you prove your creditworthiness, leading to unsecured credit opportunities in the future.
Business charge cards vs. credit cards
Business credit cards provide a helpful entry point to building business credit, but how are they different from business charge cards? The key difference is that charge card providers require you to pay off your full balance at the end of each billing cycle. As a result, you don’t pay any interest on the amounts you charge. Credit card providers, on the other hand, allow you to carry balances beyond a billing cycle but charge you interest on any amount that carries over.
Here’s a breakdown of the key differences between the two:
| Feature | Business Charge Cards | Business Credit Cards |
| Payment Terms | Full balance due after each billing cycle. | Minimum payment due after each billing cycle. |
| Interest Charges | No. | Yes, on balances that carry over beyond a billing cycle. |
| Spending Limit | No pre-set limit. Dynamic adjustments based on various factors. | Pre-set maximum credit limit. |
| Late Fees | Yes. | Yes. |
| Annual Fees | Sometimes. | Sometimes. |
| Rewards | Sometimes. | Sometimes. |
| Benefits | Sometimes. | Sometimes. |
| Credit Impact | Payment history | Payment history + credit utilization |
Both business charge cards and credit cards can play a valuable role in building business credit. The better fit will depend on if you want to be able to finance purchases for longer than a month.
Secured business credit card best practices for building credit
If you decide to move forward with a secured credit card, here are a few tips to help you use it to build business credit effectively:
- Ensure the card will be reported to the business credit bureaus: Choose a card provider that reports to one or more of the business credit bureaus: Experian, Equifax, and Dun & Bradstreet (D&B). This is required for the card to have an impact on your business credit.
- Look for a competitive card: Look for cards with competitive fees and perks. You might as well get all the rewards and benefits you can while using the card for your business expenses.
- Use the card each month: Use the card to pay for business expenses each month to demonstrate your ability to repay credit on an ongoing basis. Your spending patterns will be a factor in your future spending limit.
- Make on-time payments every month: Never miss a payment. On-time payments will help to build your business credit, while late or missed payments will work against you. Consider setting up automatic payments or reminders to reduce the risk of missing your monthly payment due date.
- Monitor your business credit reports: Check your business credit reports regularly to make sure your charge card is being reported accurately.
By following these steps, you can establish business credit while making the most out of a secured business credit card. Over time, that foundation can help you gain access to larger financing opportunities, such as business term loans, commercial auto loans, and extended supplier payment terms. Further, as your credit profile strengthens, you may qualify for funding without a personal guarantee—helping to further separate your business and personal finances.
Lili has something exciting around the corner for small business owners that can help you build your business credit profile. Stay tuned for an exciting update!
