June 26, 2019

Secured vs. Unsecured Credit Cards for Small Businesses

In this post, we’ll explain the pros and cons of secured and unsecured credit cards, so that you can make an informed decision for your small business.

Everything You Need to Know About Secured Vs. Unsecured Credit Cards

Secured Credit Cards

A secured business credit card requires collateral, which comes in the form of money deposited into an account with the credit card company (usually a bank). To do this, the bank may require that you open a savings checking or savings account with them. The amount of funds deposited into the account equal the credit limit on the business's secured credit card. Not all banks will require this, as some banks will use a savings account from another bank to secure the card. When making purchases with the card, interest will be charged on the balance. Once the balance is paid off, no interest will be incurred. You can use the card up to the amount of money that is being used as collateral, although some credit card companies may impose a limit based on a percentage of secured funds. For example, if $10,000 is being used as collateral to secure the card and the bank sets a limit on the card of 90 percent, you can charge up to $9,000 on the card. Besides interest expenses, some cards charge an annual fee and a fee for issuing employee cards. Why would someone choose a business secured card over an unsecured card, which doesn’t require any collateral? The main reason is your credit profile. If you have bad credit or don’t have a credit history, it will be almost impossible to get approval for an unsecured credit card. Secured cards reduces risk for banks that take on customers who don’t have the best credit. If your business is a startup, a secured credit card can help you build your business credit, which can open many doors down the road if you keep your credit in good standing.

The Pros and Cons of a Secured Business Credit Card:

  • Can often get approved with poor or no credit.
  • Great for building or repairing credit.
  • A cosigner isn’t required.
  • After a period of use, some credit card companies will upgrade you to an unsecured credit card.
  • Doesn’t directly help in growing your business, since you need to use cash as collateral.
  • Can’t be used for a cash flow shortage.
  • Can have higher interest rates than unsecured cards.

Unsecured Credit Cards

To qualify for unsecured business credit card, you'll need to have credit history and a good credit score. Requirements are usually higher for businesses than for personal credit cards. Credit card companies will often review your personal and business credit reports when determining qualification for an unsecured credit card. If the business has a credit history, that will also be factored in. One big advantage of an unsecured credit card is promotions. You can find credit card offers that include introductory one year or more of zero percent financing. This allows you to charge the card and pay only the minimum balance during the promotion. Be wary of terms and conditions at the end of promotions. Some cards may require any promotional balance to be paid in full. You’ll also want to continue paying the balance each month, so it doesn’t spiral out of control.

The Pros and Cons of An Unsecured Business Credit Card:

  • Can help your business grow.
  • Temporary solution to a cash flow shortage.
  • Continues building your credit.
  • With good standing, you could get periodic credit limit increases.
  • Costly option for financing growth.
  • If your business is having a difficult time paying bills, using credit cards can increase debts.
  • Missed payments or exceeding the spending limit can trigger expensive penalties.

Other Business Card Options

Now that we've covered secured and unsecured business credit cards, you may have an idea of which option would benefit your business. However, there are still a few other options to consider! If you'd like to keep yourself from overspending, a prepaid card or regular debit card might be worthwhile options. With a prepaid card, you can set spending limits by loading money onto a card ahead of time. To learn more about prepaid cards, check out our guide to the best prepaid business card options. If you'd like to have a card that accesses your business's checking or savings account, a debit card might be a worthwhile option. You won't be able to spend money you don't have yet (like a credit card), which can be helpful in avoiding the urge to overspend. However, if you need financing to cover unforeseen costs or other needs that you don't have cash on-hand for, a debit card probably won't be useful.

Conclusion: Consider Your Financing Needs Prior to Deciding Between a Secured or Unsecured Credit Card

Businesses that are new or have no credit history can still use a credit card by going with a secured card. It will require you to pay a security deposit to the credit card company that equals the credit card limit. If you have good credit, an unsecured credit card can provide you with short-term financing and help you afford business expenses. This is a great option for filling cash flow shortages, although you’ll want to pay off the balance each month to avoid high-interest rate fees. We hope this post has helped you decide on the right credit card for your business! Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2019.