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There are many reasons why small business owners get a business credit card. First, business credit cards offer unique benefits and services designed specifically for small business owners, many of which can be earned simply by using the card for everyday expenses.
However, some business owners are surprised to learn that they may still have to take on personal liability for the business cards they apply for. This is because many small business credit cards require cardholders to provide a personal guarantee.
Before you apply for a business card, it’s important to understand what a personal guarantee is and how you, as an individual, may be held liable for the balance of business expenses so you can make the smartest decision for yourself and your business’ finances.
What is a personal guarantee on a business credit card?
A personal guarantee is a clause in your credit agreement that defines your responsibility for the account. When you sign this document, you enter into a contract with the credit issuer and become responsible for paying your bills from your own assets. When looking for a business card, you should look for this clause in the fine print or business card terms and conditions.
For example, the Ink Business Preferred® credit card has a personal guarantee clause listed in the pricing and terms section.
“Personal and Company Liability: By responding to this offer, you understand that you agree to be personally and jointly with the Company personally responsible for the payment of all balances accrued on all cards and accounts issued pursuant to this application, whether now or in the future, as such additional accounts may be opened. You understand that if you leave the Company, you will remain responsible for any outstanding balances on your accounts. You must notify us immediately to close your accounts and prevent further use.”
What is the difference between a personal guarantee on a business card and personal credit card debt?
When you accept approval for a personal credit card, you agree to be responsible for repaying any balance that accumulates on the account. The same is true for a personal guarantee on a business credit card. If your company goes bankrupt and is unable to repay the debt on the account, you will be personally responsible for repaying the debt.
The main difference with a personal guarantee for a business credit card is the option for limited or unlimited liability. With limited liability, you’re only liable for a set amount for any defaulted accounts. With unlimited liability, you’re liable for the entire balance on any defaulted cards. You’ll need to check the fine print on your personal guarantee agreement to determine which type of liability you have.
Why do I need a personal guarantee on my business card?
Business credit cards are personally guaranteed because most of them are unsecured. In other words, there’s no business collateral that the issuer can claim if the account defaults. Also, business card credit limits can be very high, so extending your credit limit can be risky for a lender. A personal guarantee reduces that risk.
So if you get a business credit card, you should accept a personal guarantee and use your business card carefully: only charge when you’re sure you can pay and keep your balance well below your credit limit.
Corporate Cards
Small business cards are issued to individuals to use on behalf of a company, while corporate cards are issued to legal entities with sufficient assets and credit history, meaning the legal entity is responsible for the account and no personal guarantee is required.
What happens if I can’t pay with my business credit card?
If payments stop and your business credit card account goes into default, the issuer can (and will) seek full repayment from you. It doesn’t matter if the charges weren’t due to your own needs — you’re responsible for the company card and the expenses charged.
Also, keep in mind that business cards can affect your personal credit, depending on the issuer and the account. In many cases, issuers report business card account activity to the three major credit reporting agencies: TransUnion, Experian, and Equifax. Sometimes they only report negative information, but nearly all major banks report at least that information. In these situations, business cards won’t help your personal credit score, because positive actions aren’t reported, so they can hurt it.
As a result, the account can affect your credit score, meaning that missing a business credit card payment can negatively impact your personal credit score.
What to do if you can’t repay your business card
If you anticipate having trouble paying your business credit card debt, act early and take these steps to manage your business debt more effectively.
- Cut down on unnecessary expenses. Look for areas in your business where you can cut costs and minimize unnecessary expenses. Use the money you save to pay off credit card debt.
- Consider a balance transfer credit card. A balance transfer credit card allows you to consolidate your existing credit card debt, including business card debt, onto a new card with a low or no interest introductory APR. Consolidating your business card debt can save you money on expensive interest, but be sure to pay off any transferred balances before the introductory interest rate expires.
- Consider a small business loan. Small business loans can help you pay off your business credit card debt, and they often come with a lower interest rate than you would pay on a business card. Compare loan terms and interest rates to make sure it’s the best fit for your business finances and goals.
- Please contact your card issuer. Many card issuers offer hardship programs that can allow you to defer or delay payments, temporarily reduce interest rates, or modify your payment plan to fit your current financial situation. It’s important to contact your card issuer as soon as possible, preferably before you miss a payment, to discuss your options.
Can credit card companies take legal action against you for unpaid business credit card debt?
Yes, credit card companies can take legal action for unpaid business card debts. A personal guarantee on a business credit card allows the issuing company to seize your assets and sue you to cover losses the company incurs as a result of your default. However, lawsuits are usually only pursued in extreme circumstances, such as when the debt is large or more than six months late.
Can I make a business card without a personal guarantee?
If you’re not comfortable with a personal guarantee, there are some business credit cards that don’t require a personal guarantee, but these are usually corporate cards and require high annual revenue to qualify. For example, the Office Depot® Business Credit Account* requires that a corporation has been in business for more than three years and has annual revenue of at least $5 million.
There is also the Brex Card*, but it is not available to sole proprietors or unincorporated partnerships and does not require a credit check or personal guarantee. That said, Brex lists eligibility requirements on its website. These may include $1 million or more in annual revenue, minimum linked bank balances, equity investment thresholds, minimum company size, etc., making it difficult for some businesses to qualify.
Conclusion
After all, having a personal guarantee shouldn’t hold you back from getting a top business credit card. When you open a credit card, you sign an agreement committing to treat the account according to the terms outlined in the agreement. If you are billed and don’t pay as agreed, late payments can negatively impact your credit rating and issuers may take collection action if your account becomes seriously delinquent.
But if you use your business account responsibly, make payments on time, and manage your debt properly, you can enjoy all the great things about a business credit card: Create and maintain a good credit history, and protect your personal credit while building your business credit.
*Information about the Office Depot® Business Credit Account and Brex Card was collected independently by Bankrate. Card details have not been verified or endorsed by the issuer.
