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There are plenty of compelling reasons for a small business owner to get a business credit card. These products offer unique rewards and perks designed specifically for the small business owner. Before you apply for the card that looks the best for you and your venture, you should understand the personal guarantee that is a standard feature. You don’t want to be surprised to learn that you, as an individual, are liable for a balance you incurred for your business expenses.
What is a personal guarantee?
A personal guarantee is a clause in a credit agreement that spells out your liability for the account. If you sign the document, you form a contract with the credit issuer that you will pay the bill, out of your own assets.
When searching for a business card, look for this clause. You will find it in the pricing and terms section of the credit card issuer’s website. The language is usually something like this, for Chase Ink Business Preferred® Credit Card:
“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.”
As you can see, this is a serious clause. In the event that you falter, stop making payments and the account goes into default, the issuer can (and will) turn to you for total repayment. It wouldn’t matter that the charges weren’t for your own needs but for your company’s expenses—because you’re considered one and the same for this purpose.
Why does a business credit card require a personal guarantee?
The reason business credit card issuers include a personal guarantee is that most of these products are unsecured. That means there is no collateral for the issuer to claim if the account goes into default. Since credit lines on business cards can be very high, extending the credit lines is risky. The personal guarantee lowers that risk.
Therefore, if you’re getting a business credit card you need to be comfortable with this aspect of card ownership, and use your business card very carefully. Only charge when you’re sure you can make the payments, and try to keep the balance well below the credit limit.
Also be aware that, depending on the issuer and account, a business credit card can affect your personal credit. In most cases, the issuer will send the account information to the three major credit reporting agencies: TransUnion, Experian and Equifax. Consequently, that account will be factored into your credit scores, such as FICO Score and VantageScore.
Can you get a business credit card without a personal guarantee?
If you are really uncomfortable with the personal guarantee, there are a few business credit cards that do not require a personal guarantee. They tend to have other requirements, though.
For example, the Brex Corporate Card for Startups* has a high credit limit and excellent rewards program, but it’s not available to sole proprietors or unincorporated partnerships.
Other business credit cards that don’t need a personal guarantee do require high annual revenues to qualify instead, such as the Shell Small Business Card, which expects revenues to be at least $1 million, and the Office Depot OfficeMax Business Credit Card, which requires a minimum of $5 million annual revenue.
The bottom line
In the end, the personal guarantee shouldn’t scare you off a business credit card. When you open any credit card you sign a contract where you pledge to treat the account according to the terms. 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 it goes seriously delinquent.
But if you use the account responsibly with on-time payments and well-managed debt, you will enjoy all the great aspects of a business credit card as you create and sustain a positive credit history, and build your business credit while protecting your personal credit.
*All information about the Brex Corporate Card for Startups has been collected independently by Bankrate and has not been reviewed or approved by the issuer.