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Friday, February 23, 2024

Am I personally responsible for my business credit card?

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There are numerous compelling reasons why small-business owners may consider obtaining a business credit card. Firstly, these cards offer exclusive rewards and benefits tailored specifically for small-business owners, many of which can be effortlessly earned by using the card for everyday expenses.

However, prior to applying for a business credit card, it is crucial to grasp the concept of a personal guarantee and its implications in relation to such cards.

Before applying for a business card, it’s crucial to understand the implications of a personal guarantee. As an individual, you may be held responsible for any outstanding balances resulting from business expenses. By being aware of this, you can make well-informed decisions that align with your financial goals for both yourself and your business.

What is a personal guarantee on a business credit card?

A personal guarantee is a provision in a credit agreement that outlines your liability for the account. By signing the document, you enter into a contract with the credit issuer that holds you accountable for payment, using your own assets. When looking for a business card, it is important to carefully review the fine print and terms and conditions to identify this provision.

As an example, the Ink Business Preferred® Credit Card includes a personal guarantee clause in its Pricing & Terms section. This clause states that by accepting this offer, you agree to take personal responsibility, both individually and jointly with the Company, for the payment of all balances incurred on all cards and accounts issued as a result of this application, both now and in the future.

By acknowledging that your departure from the Company does not absolve you of the responsibility for any outstanding balances on your accounts, it is crucial to understand that prompt notification is required to ensure the closure of the accounts and prevent any further usage.

Why does a business card require a personal guarantee?

Business credit card issuers require a personal guarantee, as these products are typically unsecured. This means that the issuer cannot claim any collateral if the account defaults. Considering the potentially high credit lines offered on business cards, extending such credit lines can be a risky move for the lender. By including a personal guarantee, the risk is mitigated.

When obtaining a business credit card, it is crucial to be at ease with this aspect and exercise caution in its usage. Make charges only when you are confident about making the payments, while also ensuring that the balance remains comfortably below the credit limit. Striking this balance will contribute to the overall management and success of your business credit card.

What happens if I don’t make payments on my business credit card?

If you fail to make payments and the business credit card account defaults, the issuer has the right to demand full repayment from you. It is irrelevant whether the charges were for personal or company expenses; you are held responsible for both.

It’s important to note that a business card can impact your personal credit, depending on the issuer and account. In most instances, the issuer will share the account details with the three major credit reporting agencies: TransUnion, Experian, and Equifax.

As a result, that account will be taken into consideration when calculating your credit scores, including FICO Score and VantageScore. Therefore, failing to make timely payments on your business credit card could have a detrimental effect on your credit score.

Can you get a business card without a personal guarantee?

If you’re not comfortable with providing a personal guarantee, there are several business credit cards available that don’t require one. Instead, these cards typically have high annual revenue requirements for qualification. For instance, the Office Depot® Business Credit Account* mandates that corporations have been in business for over three years and generate an annual revenue of at least $5 million.

The Brex 30 Card, unfortunately, is not accessible for sole proprietors or unincorporated partnerships. Additionally, Brex provides a detailed list of eligibility criteria on its website, which may involve meeting requirements such as having $1 million in annual revenue, maintaining a minimum cash balance, fulfilling investment criteria, or reaching a minimum company size, among other factors.

The bottom line

Ultimately, a personal guarantee should not deter you from considering a top-tier business credit card. When you apply for any credit card, you enter into a contractual agreement in which you commit to managing the account in accordance with the specified terms. Failure to make timely payments will have a negative impact on your credit score, and if your account becomes severely delinquent, the card issuer may take necessary actions to recover the outstanding balance.

By utilizing a business account responsibly, making timely payments, and managing debt effectively, you can experience the numerous benefits of a business credit card. This includes establishing and maintaining a positive credit history, while simultaneously building your business credit. Moreover, this approach safeguards your personal credit, ensuring its protection and longevity.

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