Building credit can be frustrating. Caught in between the wheels of the financial system, some businesses take a while to find their footing when it comes to building good credit.
The system was built to service businesses who already have built some credit. But if you haven’t built any business credit, how do you get started?
My daughter’s early lesson with the credit cycle (sorta)
My daughter’s been looking for a job for a couple of months. She just graduated high school with good grades and she’s looking for a way to make some money before she goes to school, travels, whatever.
She came to me last night and says, “Dad, I have a problem.”
“Yeah, what’s that, honey?” I asked.
“I keep applying for entry level jobs,” she said. “The thing is, when I get to the interview, they all ask for relevant work experience. How can I gain work experience if I can’t find an entry level job that doesn’t require work experience??”
Her frustration was palpable. We’ve all been there at some point or another. Looking for a first job seemed impossible. She knows she needs to get her first job to start building her resume and skills, but even entry level jobs required some work experience.
A secured credit card can help jumpstart business credit
Building a strong credit history is full of similar contradictions. To start building credit, you need to show that you’re trustworthy to pay back any money you borrow. But no one is going to lend you any money without any credit history. Stuck.
Enter the secured credit card.
The secured credit card is what it sounds like — it’s a credit card that requires a cash deposit up front.
That’s the secured part. This isn’t a debit card, though, so your security deposit won’t be used to pay off your bills. It sits, lonely, in an account somewhere, while you spend and pay off your credit card. To get a secured credit card, a business needs to pony up at least a couple hundred dollars, which the credit card companies would generally take if you default on paying your credit card bills.
Your credit line will be lower than your deposit, but you can continue to grow your credit line by adding more cash to the deposit.
The benefits of a secured credit card
But it’s a true credit card, not a debit card. That means that when you swipe it to make purchases, it goes through the credit card networks. The credit card companies will report your transactions to the firms that score business credit, like Dun and Bradstreet. These transactions will begin to build your credit score so that, eventually, your business would be able to qualify for a regular business credit card.
Let’s not beat around the bush: secured credit cards are for business with poor or little credit history. For the credit card companies, that’s a risky customer and the interest rates secured business credit cards charge are generally quite high.
But these cards can be used as stepping stones, helping a business with little or poor credit to build (or rebuild) its credit history and move on to an unsecured credit card or a business loan with lower fees and better options and rewards.
Where to get a secured business credit card?
Many credit card companies offer secured business credit cards in addition to their unsecured business cards.