A business credit card can build your credit profile and help when making essential purchases for your business, but if your credit score has taken a hit or two, qualifying for one may be difficult – though it's not impossible. Learn how small business owners with bad credit can get approved for a business credit card. [Looking for an alternative to credit cards? Check out our review of business loans.]
Can you get a business credit card with bad credit?
Credit card issuers look for a good credit score (which is considered to be 670 and above, according to Experian), the same as they do with individuals applying for a personal credit card. The higher the score is, the more creditworthy the borrower is considered. The lower the score is, the riskier the business owner appears. (Scores ranging from 580 to 669 are considered fair, while scores ranging from 300 to 579 are considered very poor.)
When assessing the creditworthiness of a business borrower, the card issuer considers income from all sources, but one's personal credit score dictates whether the applicant will be approved and how much interest they will pay.
"Those with bad credit will have a difficult time getting a credit card since there aren't a lot of cards aimed at that particular segment," said Gerri Detweiler, education director at online business lender Nav. "There are some issuers that will issue (credit cards) with a 600 score, which is not a bad credit score but not a great credit score."
Why would you want a business credit card?
There are several reasons why you would want an unsecured business credit card, but a big one is that a business credit card keeps personal and business expenses separate. That enables you to more accurately track your expenditures, and it makes record-keeping easier.
A business credit card may give you more purchasing flexibility. Many small business owners face cash flow issues from time to time; having a business credit card can alleviate some of those pressures.
If you're just starting out or haven't been in business for too long, a business credit card can help you build or enhance your business credit score. If you are responsible with the card and make payments on time, your credit score will increase, making it cheaper to borrow money in the future.
What credit score do you need to get a business credit card?
The credit score requirement will vary among issuers, but many business credit card companies require a credit score of 675 or higher. That's not to say there aren't options for borrowers with poor credit scores, such as those with scores hovering around 600.
What is a secured business credit card?
For business owners with bad credit or no credit history, a secured business credit card is a viable way to improve one's credit score and access credit.
With a secured card, the credit card company requires a deposit upfront. Your credit limit is typically in lockstep with the deposit. The more on-time payments you make, the more your credit line increases. If your account stays in good standing, which means no late payments, your credit score increases over time.
"Payment history accounts for 35% of your credit score," said Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. "Business owners would be wise to make on-time payments."
Aside from the deposit requirement, secured credit cards are similar to unsecured credit cards: There's an annual percentage rate (APR), an annual fee and potentially other charges.
Alternatives to business credit cards
If a credit card is not an option, there are alternative routes. One of the most common is a line of credit. This can be issued without being tied to a major credit card. Lines of credit can be extended by any lender (typically banks). You can also get a line of credit with suppliers or business partners. Lines of credit give you access to additional cash for important purchases. The major difference is that the line of credit is usually extended for a specific purpose, such as replenishing inventory; it cannot be spent freely.
What can you do to build credit if you don't want a secured card?
If you don't want a secured card but still want to rebuild poor credit (or establish a good credit history if your business is new), another option is to apply for financing from a vendor.
"There are a number of business suppliers, most notably office and industrial supply companies, that are a little more lenient when it comes to using credit," said Coleman. "Businesses [that] secure an account with one of these and make sure to pay invoices on time will improve their credit."
The purchasing limit may be low to start with, but over time, it increases if you meet your obligations. "There are a number of companies that offer these types of accounts," noted Coleman.
How has COVID-19 affected business credit card issuers?
Before you apply for a business credit card, things have changed because of COVID-19.
"In the past few months, the business credit card market has tightened considerably due to COVID-19," said Detweiler. "Many have pulled back on marketing to small business owners."
Things to avoid when building credit
You can also improve and build your credit by avoiding a couple common mistakes.
- Limit your credit inquiries. Every time you apply for any type of credit card, line of credit, or loan, there will be a credit inquiry. Too many of these is seen as a red flag and lowers your credit score.
- Separate your personal and business expenses. Many new and small businesses run as LLCs. This setup makes it easy to mix your personal and business finances, and that can be ruinous for the business's credit. For example, if you need to buy a car for personal reasons, you don't want those credit inquiries and that debt tied to your business.
What are some business credit cards for people with bad credit?
Despite some business credit card issuers being more cautious about whom they approve, there are options for business owners with bad credit. Below are three.
1. Spark Classic from Capital One
Spark Classic from Capital One is geared toward business owners with bad credit. It considers applicants with credit scores as low as 580. You aren't required to make a deposit with this card, but you will pay a hefty APR. At last check, the APR was 26.99% for purchases and cash advances. There are no annual fees, and you earn 1% cash back on every purchase for your business. You can redeem points at any time, regardless of how much you've accumulated.
Capital One reports your payment history to all three credit bureaus (Equifax, Experian and TransUnion). That means both your personal and business credit score get a boost each month you make your payment on time.
2. Wells Fargo Business Secured Credit Card
The Wells Fargo Secured Business Credit Card provides credit lines from $500 to $25,000, depending on the amount of your deposit. You earn 1.5% cash back for every dollar spent using the credit card.
There is a $25 annual fee, and the APR on purchases is prime plus 11.90%. For cash advances, Wells Fargo charges prime plus 20.74%.
Wells Fargo reports your payment history to the credit bureaus, too, and it periodically reviews your account and recent credit history to see if it can upgrade you to an unsecured business credit card.
3. BBVA Secured Visa Business Credit Card
The BBVA Secured Visa Business Card is geared toward business owners who have cash in the bank but who have a bad credit score. The card is linked to a BBVA savings account. The minimum deposit is $500. Your line of credit is 90% of the balance in your savings account. You can add funds to your savings account in $100 increments to increase your line of credit.
There is no annual fee for the first year. After the first year, the annual fee is $40. You can add employee cards free of charge and can set spending limits for each card. Cardholders earn 1.5 points for every $1 in qualified purchases. The APR on purchases is 16.24% and jumps to 25.24% for cash advances.
What should you look for in a business credit card?
What makes the cards listed above better than most? You can scrutinize a few components of the cards and what they offer to get a good idea. Annual fees, APR, consumer protection, and customer service tend to be the most important considerations.
All major credit cards have annual fees. These fees are part of how the credit card companies make their money. Since bad-credit cards are higher risks, it is common for them to charge higher annual fees. Compare the annual fees on your credit card offer to others to get an idea of how fair it is. Keep in mind that while low annual fees are nice, higher fees might come with better perks or be a better deal overall if you can afford them.
The APR, or annual percentage rate, is the interest rate on the credit card. For many businesses, this is the most important part of the deal. If you carry a balance on the credit card, a high APR can be devastating. Businesses that do not carry balances and never have to pay interest on their cards, meanwhile, might opt for a higher APR to get better deals in other regards. The inverse is also true: Some cards have higher annual fees and lower APR.
Consumer protection is extremely important to some businesses and worth very little to others. It covers a wide range of services. Some cards will automatically insure all purchases over a certain threshold. Cards may also provide identity theft protection and other useful resources. You should choose a card with consumer protection services that make sense for your business.
Customer service is important in any product exchange. Everyone wants access to good customer service when things go wrong. Read customer reviews on the credit card you are considering to gauge the customer service.
How to use business credit cards to improve your credit
While your options for business credit cards may be limited now, by using the card you're approved for responsibly – be it secured or unsecured – (for example, you are judicious about your purchases, you make payments on time, etc.), your credit score will go up, the maximum limit increases, and you can qualify for other business credit cards and other types of business financing.
Here are four steps you can take to improve your business's financial situation.
- Identify the cause of your credit problem. Your credit score took a hit for a reason. Perhaps you missed too many payments or you have more debt than you can manage. You have to acknowledge and change the behavior that caused your current credit predicament. If you don't, you will be in an even deeper financial quandary.
- Pay on time. Your credit score is based in large part on your payment history. By paying your balance on time, your credit score will get a boost. To ensure you do that, set an alert to remind you a week before the payment deadline or, better yet, set up automatic payments with the card issuer.
- Monitor your credit score. By making payments on time and not taking on an unreasonable amount of debt, your credit score will improve. Within a few months to a year, you can apply for an unsecured business credit card, but to do that, you need to monitor your credit score. Business owners are advised to check their score with Equifax, Experian, and TransUnion quarterly, or at least twice a year.
- Think about the long term. It's easy to splurge on something you and your business can't afford. But that short-term gain can lead to financial pain later. Coleman advised business owners with poor credit to focus on reaching financial stability as soon as possible, which will prevent you from running into trouble when trying to access money in the future. "It's a lot easier to grow your business when you have access to capital. That access comes with positive financial practices."