Keeping personal and business finances separate is a cardinal rule of owning a business. But there are instances where it’s impossible to keep the two apart (by no fault of your own). One example? Business credit cards. If you’re applying for a business credit card, chances are you’ll have to share your personal credit history to even apply.
There’s a strong link between your personal credit and your business credit — especially if you’ve just started your business. Because you don’t have an established credit history, you may have to sign a personal guarantee that makes you personally responsible for your business debts.
Business credit cards are a great resource to keep a business humming — but they’re not without risks and should be used wisely. This is why PayPie advocates monitoring cash flow to get a 360° view of your company’s incomes and expenses.
Business credit cards and personal credit
When card issuers approve credit card applications, their primary decision factor is risk. Before extending credit, they want to know if, historically, a borrower has paid back their obligations on time.
The tricky issue for new businesses is their lack of credit history. It’s hard to determine how good you are at paying off debt if your company doesn’t have a borrowing history in the first place. This forces creditors to look elsewhere to get a sense of their applicants’ creditworthiness. The first place they look? Your personal credit.
If an applicant has a personal history of paying on time, it’s likely that they’ll pay their business credit card bills on time too. In this respect, business credit cards function as an extension of your own personal credit. Until your business takes on debts of its own and builds its business credit history, your personal track record serves as a substitute.
Business credit cards and personal liability
The connection between your personal credit and your business credit card doesn’t end at the application process. You can expect to sign a personal guarantee when you open your card as well. The personal guarantee is a promise to your creditor that you will pay for debts if your business can’t.
The idea of taking on your business’ debt can sound intimidating. After all, most entrepreneurs set up business entities like limited liability corporations (LLCs) or S-corps to separate their business liability from their personal obligations. But, business entities only offer so much protection and little of it extends to paying off your company’s credit card balance.
The CARD Act of 2009 protects personal credit card holders from several practices, such as arbitrary interest rate increases, double-cycle billing, and unfair payment allocations. But, the act doesn’t cover business credit cards. Many major business credit card providers offer their customers the same or similar protection. When you apply for a card, just make sure you know if your provider offers any protection from unfriendly practices.
Circumventing a personal guarantee (Why it’s hard)
Not every credit card requires a personal liability guarantee. There’s a chance you won’t have to sign one if your personal credit is stellar, you have a preexisting relationship with your creditor, or your business already has a solid credit history. Alternatively, you and your business partners can apply for a limited liability business credit card, but unless you’re making millions in revenue, you probably won’t get approval.
Regardless, unless you specifically go out of your way to avoid a personal guarantee on your business credit card — and have an outstanding credit history with significant revenue — you’re likely going to need to sign one.
How business debt affects personal debt
Not only are you personally responsible for business credit card debts if your company can’t take care of them — your personal credit history will also be on the line if creditors don’t get paid.
Of course, bankruptcy is a last resort. If your company completes the Chapter 11 process, you can still potentially continue to run your business and settle your debts entirely through the financial veil of your company. But, if your company doesn’t qualify, can’t meet obligations, or otherwise folds before or after bankruptcy — you’re personally liable for your company’s unpaid credit card bills.
Should your business’ debt issue get to a point where you can’t pay back business purchases yourself, you may even need to file Chapter 7 bankruptcy as an individual, too.
Protecting your business and personal credit
The idea of business credit card providers having access to your personal finances is a frightening one. But, there are ways to mitigate the prospect of this happening.
Establish a strong credit history for your business if you want to create distance between your personal and business credit. The longer your track record of paying on time, the more trustworthy you’ll appear to creditors. The more trustworthy your company is, the better your interest rate will be. Creditors will also be more likely to work with you when payment issues arise, giving you more flexibility to pay back debts.
Aside from generating revenue, the other way to create space between your business and personal credit is time. The longer you’re in business, the more likely banks are to view your company’s financials as separate from your own personal history. There may not be much you can do to influence the passing of time. However, patience perseveres here.
A business credit card is only one component of your company’s suite of credit and payment tools. Keeping track of them all, while doing all you can to improve your business’ credit, can be challenging.
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This information does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.
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