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Key takeaways
- A personal guarantee on a business credit card means you are personally liable to pay off the card, and the issuer can take your personal assets to make card payments if necessary.
- There are business credit cards that don’t require a personal guarantee, but it’s more difficult to qualify for such cards.
- If you don’t make payments on a business credit card that’s personally guaranteed, your credit score could be affected.
There are lots of good reasons that a small business owner may want to get a business credit card. For starters, business credit cards offer unique rewards and perks that are specifically designed for small business owners, many of which can be earned simply by using the card for everyday business expenses.
Some business owners, however, are surprised to learn that they could be held personally liable for unpaid balances and debt on any business cards that their business acquires. This is because many small business credit cards require cardholders to provide personal guarantees.
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 liable for any balances incurred for business expenses. That way, you can make the most educated decisions for you and your business’s finances.
What is a personal guarantee on a business credit card?
A personal guarantee is a clause in a credit card agreement that outlines your personal liability for the account. When you sign the document, you form a contract with the credit issuer that holds you responsible for paying the bill out of your own assets. When searching for a business card, you’ll want to look for this clause in the fine print of the business card’s terms and conditions.
For example, the Ink Business Preferred® Credit Card has this personal guarantee clause listed in the Pricing & Terms section:
“Individual and Company Liability: You understand that by responding to this offer you agree to be personally responsible, both individually and jointly with the Company, for payment of all balances incurred on all cards and accounts issued pursuant to this application now or whenever such additional accounts may be established in the future. You understand that if you leave the employment of the Company, you will continue to be responsible for the outstanding balances on the accounts. You must notify us immediately to close the accounts and prevent further usage.”
What is the difference between a business card personal guarantee and liability on your personal credit card?
When you accept the terms and conditions of a personal credit card, you agree to be liable for repaying any balance you accumulate on the account. The same is true with a personal guarantee for a business credit card. If your company becomes insolvent and can’t repay the debt on the account, then you would be personally liable for repaying the debt.
The main difference with a personal guarantee on a business credit card is that you may be offered either limited or unlimited liability. With limited liability, you would only be liable for a set dollar amount for an account in default. This is typical when your company has more than one owner or partner. Unlimited liability means you’d be responsible for the full balance on the defaulted card plus any interest or fees. To determine which kind of liability you have, you would need to check the terms and conditions of your credit card agreement.
Why does a business card require a personal guarantee?
Business credit cards are personally guaranteed because most of these products are unsecured. In other words, there is no business collateral for the issuer to claim if the account goes into default. And since credit lines on business cards can be very high, extending the credit lines can be risky for the lender. A personal guarantee lowers that risk.
So if you’re getting a business credit card, you’ll need to be comfortable with a personal guarantee and use your business card carefully. Only charge when you’re sure you can make the payments, and try to keep the balance well below the credit limit.
A word about corporate cards
Small business cards are issued to individuals to use on behalf of their business. A corporate card, on the other hand, is issued to a corporation with significant assets and credit history. That means the business entity is liable for the account and a personal guarantee isn’t typically required.
Are you personally liable for a business credit card?
Yes, you could be held personally liable for any unpaid debt on your business credit card’s account if the card’s terms and conditions include a personal guarantee. Depending on your card’s agreement, you could face unlimited liability, or your liability could be limited to a predetermined amount. Additionally, any late payments could potentially be reported to the consumer credit bureaus and affect your personal credit score.
What happens if you can’t make payments on your business credit card?
In the event you stop making payments and the business credit card account goes into default, the issuer can turn to you for total repayment of what is owed — provided the card’s terms and conditions include a personal guarantee. It doesn’t matter that the charges weren’t for your own needs: You’re liable for the company’s card and the expenses charged.
Also, be aware that a business card can affect your personal credit, depending on the issuer and account. In many cases, the issuer reports your business card account activity to the three major consumer credit reporting agencies: TransUnion, Experian and Equifax. Sometimes they only report negative information, but nearly all major banks report at least that. In this situation, a business card won’t help your personal credit score since positive behavior isn’t reported, but it can hurt it.
Steps to take if you can’t repay your business card
Take action early if you foresee trouble paying your business credit card debt, and take the following steps to more effectively manage your business debt:
- Cut unnecessary expenses: Look for areas where you can cut costs in your business and minimize unnecessary spending. Direct any savings gained toward paying down your credit card debt.
- Consider a balance transfer credit card: Balance transfer credit cards allow you to consolidate your existing credit card debt — including business card debt — to a new card with a low- or no-interest introductory APR. By consolidating your business card debt, you’ll save on expensive interest charges. Just make sure to pay off the entire transferred balance before your introductory rate expires.
- Look into a small business loan: A small business loan can help you pay off business credit card debt, often at lower rates than you’d pay by carrying a balance with a business card. Compare terms and interest rates of the loan to ensure it’s the best for your business finances and goals.
- Contact your card issuer: Many card issuers offer hardship programs that may allow you to defer or delay payments, reduce your interest rate temporarily or work out a modified payment plan that fits your current financial situation. It’s crucial to reach out to your issuer as soon as possible, ideally before you miss a payment, to discuss your options.
Can a credit card company take legal action for unpaid business credit card debt?
Yes, credit card companies can take legal action against you for any unpaid business card debt. The personal guarantee on business credit cards enables issuers to sue you in order to recoup their losses from your unpaid business debt. With that said, they will typically do so only in extreme circumstances where the debt is substantial or late by six months or more.
Bankrate’s take: If you receive a summons from your issuer, do not ignore it. Confirm the debt and contact an attorney for guidance.
Can you get a business card without a personal guarantee?
If you’re uncomfortable with a personal guarantee, there are a few business credit cards that do not require a personal guarantee. These are typically corporate cards, however, and require high annual revenues to qualify.
For example, the Brex Card* is not available to sole proprietors or unincorporated partnerships. It also requires more than $1 million in annual revenue, a $50,000 minimum linked bank balance, equity investment criteria or a minimum company size — making it difficult for some businesses to qualify.
The bottom line
In the end, a personal guarantee shouldn’t scare you away from getting a top business credit card. When you open any credit card, you’ll sign a contract where you’ll pledge to treat the account according to the terms outlined.
If you charge but do not make your payments as agreed, late payments will negatively affect your credit rating, and the issuer can take steps to collect if your account goes seriously delinquent. But if you use a business account responsibly with on-time payments and well-managed debt, you can enjoy the positives that carrying a business card can bring — including building your business credit while protecting your personal credit.
*The information about the Brex Card has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.
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