When you apply for a business credit card, there are different factors that you need to understand. One of the most important caveats of a business credit card is the personal guarantee.
What Is a Personal Guarantee?
This is a clause in your credit card contract that says you are responsible for your business debt. Specifically, this refers to your personal assets. If your business cannot pay its debts, then a personal guarantee means you will pay the debt out of your own finances. In essence, a personal guarantee is a bit like cosigning a credit card. If something goes wrong and debts need to be repaid, the creditor has the right to pursue you until the debt is settled.
Creditors use a personal guarantee because it provides them with collateral. They want as many avenues as possible to ensure that they get their investment back. This is why many business credit card applications include a personal guarantee as a standard part of the contract.
Are There Risks Involved?
There are numerous risks associated with a personal guarantee on your business credit. If your business fails, you will be held personally responsible for the financial burden. For small business owners, this type of responsibility can be disastrous. Even if you declare bankruptcy through your business, you cannot get rid of the debt until you declare personal bankruptcy as well.
This creates a long string of further complications for your personal credit. Even if you manage to avoid personal bankruptcy, your credit score can be badly damaged by missed business payments. Moreover, there is nothing stopping creditors from suing you personally in order to get their money back.
Your business structure may not protect you from personal liability if you agree to a personal guarantee. In most cases, business classifications are not factored into the legal ramifications of such a clause. Organizing your business the right way can protect you from civil litigation, but it is useless when it comes to a personal guarantee.
Overall, a personal guarantee subjects everything you own to risk. You could even lose your home or other properties if your business cannot repay its debts. If your credit is ruined in the process, you will feel the ramifications personally and professionally for years to come.
How Do I Avoid a Personal Guarantee?
The only way to avoid a personal guarantee is to know where to find it. Most business credit card applications include a clause related to the personal guarantee in the fine print. Although the placement will vary, it is often located near the Schumer box. It is also worth noting that the terminology may not be standardized. Instead of “personal guarantee,” the phrase “personally responsible” may be included. If you see anything that insinuates this idea, be wary of the card’s terms and conditions.
You should also look for any reference to liability “individually and jointly with the company.” This is the credit card company’s way of indicating the account will have joint liability. This is another way in which a personal guarantee can be included in your business credit card contract.
This problem is far more prevalent for small business owners. Most of the time, larger companies can get commercial liability. The notion is that larger companies have more assets that can be liquidated in case of insolvency. There is no such layer of assets for most small businesses, which is why credit card companies prefer using personal guarantees.
Making Informed Decisions
With so many risks involved, most business owners are smart to think twice about a personal guarantee on their business credit card account. Unfortunately, small business owners do not usually have a lot of alternatives. The vast majority of credit cards for small businesses require such a clause. While you may be able to pursue less traditional funding options through Kickstarter or Indiegogo, a business credit account is simply an easier way to get the money you need to conduct business.
The critical point to remember is that the risks are only associated with business failure. If you manage your business finances well and pay your balance on a monthly basis, business credit cards are an asset for your ultimate success.