Thursday, July 6, 2017

What’s the Difference Between Secured and Unsecured Business Credit Cards?

If you’re a small business owner with less-than-stellar credit, you might be considering a secured business credit card. Secured cards are easier to qualify for, and they help raise your credit score so you can eventually get approved for traditional lines of credit. But what does a secured card mean, exactly?

We break down the differences between secured and unsecured business credit cards to help you decide which is best for your company. Then see our top picks for secured credit cards.

What Is a Secured Credit Card?

First, let’s talk generally about secured loans compared to unsecured loans. When you take out a secured loan, you offer up something—for example, a deposit or an asset like your car or house—that the lender can keep if you default. Auto loans and mortgages are secured loans, because if you can’t stay on top of your debts, your car can be repossessed or your house foreclosed on.

Now, for unsecured loans. Here, you can take out a loan without putting down any collateral. If you default, you might face hefty penalties, debt collectors, or bankruptcy, but you won’t necessarily have to hand over a specific asset. Unsecured loans are riskier for lenders, so they often have tighter lending standards or higher interest rates (or both). If you have bad or no credit, you may not be able to qualify for this type of loan.

The same principles apply to secured and unsecured credit cards. Unsecured credit cards are what most people think of when they think of credit cards—you apply, you’re approved based on your credit score, and you can borrow up to the credit limit without giving the bank any collateral. Secured credit cards require you to post an upfront deposit (usually equal to the line of credit) that the lender can keep if you default. Your deposit isn’t used to pay off your balance—instead, it’s held as collateral and returned to you when you close the account.

You may be wondering why you should make an upfront deposit to borrow money—after all, the point of taking out a loan is that you need more funds than you have available. It’s true that secured credit cards aren’t much help in getting more capital for your business. However, they are useful for building up your credit score so that you can eventually qualify for unsecured loans. If your personal credit is shaky and you can’t qualify for loans based on your business’ credit, secured cards are a way to rehab your FICO score.

Should I Apply for a Secured or Unsecured Credit Card?

Whether you get a secured or unsecured business credit card, you almost certainly need to make a personal guarantee. This means that you personally are on the hook for unpaid debts, even if your business is an LLC. The upside of personal guarantees is that you can qualify based on your own credit history, which is handy for businesses that can’t provide years of revenue, profit, and on-time payment records.

If your personal credit is less than ideal, you might need to use a secured credit card to beef it up. By building a history of on-time payments and responsible use, you can boost your FICO score to the point where a personal guarantee can get you an unsecured business credit card.

However, if you can, you should go straight to unsecured credit cards. Not only will you actually be able to borrow funds for your business without a deposit, but you’ll probably save on fees and earn better rewards. Secured cards are a loan of last resort. If that’s the route you take, here are our picks for the top secured credit cards.

Top Secured Business Credit Cards

Best Business-Specific Card: BBVA Compass Secured Visa® Business Credit Card

The BBVA Secured Business Credit Card is one of the few secured credit cards out there that are meant for corporate use. Its $40 annual fee is waived the first year, and it offers free employee cards as well as a rewards rate of 1 CompassPoint per $1 spent on qualifying purchases in bonus rewards on the category of your choice. The minimum security deposit is $500, and your credit line is 90% of the deposit.

The annual fee and relative clunkiness of CompassPoints compared to cash are marks against the BBVA card. However, using a business-specific card has its perks—the other card on our list doesn’t offer employee cards, for example. Plus, BBVA doesn’t report business credit card usage to personal credit bureaus. (It doesn’t report usage to commercial credit bureaus either, so it’s not that helpful in establishing business credit).

If you’re worried about card usage reflecting poorly on your personal FICO score, plan to close the card before its annual fee kicks in. Or if you really need employee cards and accounting help, the BBVA secured card is a solid choice.

No Annual Fee: Discover it® Secured Card

The Discover it® Secured Card—No Annual Fee is one of the rare secured credit cards that doesn’t charge annual fees. It goes one step further by waiving foreign transaction fees and over-the-limit fees, as well as your first late payment fee. Its minimum deposit is an affordable $200.

Even better, the card offers  2% cash back on up to $1,000 spent per quarter on gas and restaurants and an unlimited 1% cash back elsewhere. Finally, after your first account anniversary, Discover will match all the cash back you’ve earned. This means that for the first 12 months of cardmembership, you’re earning 4% back on gas and dining and 2% elsewhere—not too shabby for a secured credit card.

Discover also makes it easy to graduate to unsecured credit cards. Every seven months, the bank automatically reviews your account to see if your on-time payments qualify you for an upgrade.

Keep in mind that the Discover it is a personal credit card, not a business one. This means no business-friendly perks like employee cards or accounting help—and if you mix personal and business expenses on the card, you’re in for a headache come April 15th. Still, with its rewards and no annual fee, the Discover it is a great option for rehabbing your credit.


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