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A secured business credit card is slightly different than its opposite unsecured type. With an unsecured card, lenders hazards more risk, since they can’t be certain that money charged on the card will ever be paid. They’re often unwilling to extend this type of loan to a business unless it has an excellent credit rating. Unfortunately, most businesses don’t start with much of a credit rating, and unless the credit card company wants to take a risk (and most don’t), they’re not likely to issue business credit cards and will instead ask a business owner to apply for a personal card, which means personally being responsible for business debt. The alternative for many companies is to obtain a secured business credit card.
The reason this type of card is secured is because it requires borrowers to establish a savings bank account, to which the lender would have access if debts were unpaid. People don’t pay their bills out of this account in most cases, but have to set the money aside and not use it, to prove their creditworthiness. Usually the credit available on the secured business credit card is the amount deposited in the savings account.
As many people know who are establishing credit, it tends to cost more to use credit cards. Business owners may expect a secured business credit card to have higher application fees and interest, and they shouldn’t be surprised if they pay more money on credit card transactions they make. They may however, depending on the lender, still qualify for rewards like cash back, bonus points or frequent flyer miles. Though the fees are pricier, some business owners, especially those who are establishing or repairing credit, feel the extra costs are worth it, because a loan that reports to a credit agency can do much to improve credit in future.
Many businesses also appreciate possessing a secured business credit card because these cards are so convenient when it comes to making purchases. They can track spending and deliver the results in a monthly statement. Companies that don’t yet have the credit to obtain an unsecured card may feel that not having any credit card is a loss of status that may reflect poorly on their business. A business owner might not want to take a prospective client out to lunch and pay with cash or a personal card, as this might suggest the business is not solvent or not professional enough.
On the other hand, others find the extra fees of a secured credit card a drawback, and the fact that some income of the business must sit untouched in an account is too high a price to pay. A good solution for these folks is to use an ATM or check card, which bears a major credit card company symbol. These may be used in almost places credit cards are used, but they don’t enhance credit rating.