A lot has been talked about business credit cards. Companies are more open to getting one for their operations. These cards can transform the way companies manage their financial operations providing benefits like efficiency, cost optimization, and automation. However, there is a small complication that companies face when they try to acquire a business credit card.
You see, one of the eligibility criteria to get this card is having an established credit history. However, for new business owners who have just set up their company, it is impossible to prove their creditworthiness. However, there is one option available: a secured business credit card.
Secured business credit cards are alternatives that startups and freshly minted companies can leverage to establish their credit history. Let’s understand what they are and how they work.
What are secured business credit cards?
A secured business credit card is similar to a corporate card but with a catch. Cardholders must first load a refundable amount as a security deposit for the card to be activated. Usually, the security deposit will be equal to the credit line that it offers in the initial months. Additionally, the card issuer will require you to link your bank account with the card to automate the deduction of deposit amounts from your account.
In terms of usage though, secured credit cards work the same as regular business cards allowing you to make a range of purchases, and transactions. However, the transactions that you make using these cards are not deducted from the deposit amount. Instead, the card providers will raise monthly statements and bills, which must be paid every month. Upon failure to clear the dues, you will be penalized with high interest rates.
Your usage of a secured business credit card is reported to the credit bureau, which will assess and declare your creditworthiness. For small businesses, especially, it is a brilliant way to build business credit. For some businesses, credit card reports are not reported by default. In such cases, business owners must report the payment and usage history to consumer credit bureaus.
Unsecured business credit cards – A short primer
Unsecured business cards are the ones that card providers issue after a thorough investigation of your financial health and credit score. As these cards are allotted without any collateral like a security deposit, they are called unsecured business credit cards.
How do secured business credit cards work?
Secured credit cards work exactly as unsecured cards but with different interest rates and service fees. For example, normal business cards allow cardholders to withdraw cash as well. While this can be done with secured business credit cards, they generally charge exorbitant charges.
Secured corporate cards allow businesses to clear bills of other cards, pay off debt, and other business transactions. Companies get monthly statements of transactions, which must be paid well before the due date. If you fail to do so, the card providers will be well within their rights to deduct the amount from the security deposit.
By being smart and disciplined, you can use secured business credit cards to build a good credit score. If you succeed in building a healthy credit history by timely payments, your business will be qualified to get an unsecured credit card. However, it can also hurt your financial standing if you take on high debt nearing your credit limit. It is wise to keep the spending through secured cards under the approved limit.
Pros and cons of secured business credit cards
Like any other corporate card, secured business credit cards have their pros and cons that businesses must closely evaluate before making a decision. They are given below.
Pros
- It is a great way to build a credit score for your newly established business.
- By being mindful of its usage like making on-time payments, a secured business credit card can pave the way for unsecured cards.
- While it is not advisable, even if you end up gaining a bad credit score, it won’t affect your chances of qualifying for unsecured business credit cards.
Cons
- Secured credit cards attract high interest rates when compared to their unsecured counterparts.
- The available credit limit accessible to your business is either low or linked to the security deposit that you pledged.
- These cards can max out after just a few transactions because their credit limit is relatively low.
Build business credit score with secured cards
Business credit cards are a great financial tool for companies that are still finding their place in the market. When you are still in the nascent stages, access to financial products and credit services is limited. The restrictions are extended to corporate credit cards as well. That is, without proof or financial history of your credit usage, it is almost impossible to get an unsecured card. This makes secured business credit cards a go-to option for small and medium-sized businesses that are still new and require all the help from the FinTech industry.
To address the market void for a robust and business-centric credit card, Zaggle collaborated with YES BANK to launch the YES BANK Zaggle Corporate Card. It allows companies to strengthen their expense and spend management workflows through access to real-time analytics solution, ZatiX.
To learn more about Zaggle business credit cards or ZatiX, reach out to us.