Running a small business is not for the faint-hearted. In fact, meeting small business financial obligations can sometimes be very stressful and feel like robbing Peter to pay Paul. In other words, making decisions about which invoices get paid and which ones don’t isn’t easy. And, although this may have been a fact of life over the last few years, it takes a toll on the business’ credit rating, making it even harder to get a small business loan.
This has been particularly true as businesses suffered and access to capital dried up during the recession. As the business climate improves, many businesses with less-than-perfect credit are finding they need to improve their credit to borrow money to fuel growth and fund working capital.
Rebuilding a good credit history can be a challenge. A secured (think pre-paid) credit card can be a good place to start. Basically, a secured credit card works in conjunction with a savings account that secures the line of credit. Your credit limit will be the amount in the savings account minus any fees associated with the account. The trick to building or rebuilding your credit score is to make small purchases and religiously pay the balance on time every month.
If you plan on using a secured credit card to rebuild your credit:
1. Make sure the issuer reports your history to the credit bureaus: If you make timely payments and have a good track record with a credit card company that doesn’t report to the credit bureaus, it doesn’t help you build your credit. If it’s a personal credit card, make sure it reports to the right credit reporting agencies and if it’s a business credit card, make sure it reports to the business reporting bureaus.
2. Don’t max out the card: Keeping your credit card usage to 10%-15% of your available limit is a good idea. When the credit bureaus judge your score, one of the things they look at is how much of your available credit you regularly use—keeping that percentage to a minimum will help your profile.
3. Don’t be afraid to start off small: It’s not uncommon for a secured credit card to have a $500 limit (or maybe even less). Slow and steady wins the race when rebuilding a credit profile. Consistency over time is the strategy that works the best. A low-limit secured credit card can turn into a higher-limit unsecured credit card if you demonstrate an ability to manage the credit appropriately.
There are no real shortcuts to rebuilding your credit—it takes time. But that doesn’t mean there aren’t tactics you can use to nudge it along and using a secured credit card is one of them.