When you open a small business, you’re not the only one taking a huge financial risk – your credit card issuer is, too. To minimize losses in the event that your company fails, lenders generally require you to sign a personal guarantee and provide your Social Security number when you apply for a business credit card. Here’s what that means for you.
What is a personal guarantee?
A personal guarantee is an agreement you make with your creditor to personally pay your business’s debts if your company doesn’t. It’s similar to cosigning for someone’s credit card. If your venture falls behind on payments in this case, you’ll be on the hook for payments and the creditor has the right to go after your personal assets.
Personal guarantees trump various business classifications. You may think that, by organizing your business as an S-corporation, C-corporation or Limited Liability Company, you’re shielding yourself from any personal liability – but that’s not always the case.
True, limiting your liabilities by using certain business classifications makes it more difficult for people to go after your personal assets in certain situations. If you had an LLC and an unhappy customer sued you, for instance, your personal assets would be protected in most cases. But if your LLC fell behind on business credit card payments and you had signed a personal guarantee with your credit card issuer, you’d likely be personally liable for the debt.
What does a personal guarantee look like?
Generally, if you’re applying for a business credit card, you’ll see a clause about a personal guarantee somewhere in the terms of agreement, below the Schumer box. Before applying for any credit card, make sure to read the terms carefully and look for phrases like “personally responsible” to understand what you’re getting into. Here’s an example from Chase’s Ink Business Preferred℠ Credit Card‘s terms and conditions:
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.
As in this case, most small business credit cards also specify liability “individually and jointly with the Company,” sometimes called joint and several liability. This means that if your company doesn’t pay, your creditor is legally able to pursue the party with the deepest pockets, whether that’s you, your company or a combination of both.
In some cases, larger, more established companies may be able to get commercial liability instead of joint and several liability, placing that responsibility to pay on the business, not the individuals. In this case, a personal guarantee isn’t required. Unfortunately, that option is unavailable to most small business owners.
If you’re unclear about the terms on your credit card application, or if you can’t tell whether or not you’re signing a personal guarantee, call the issuer for clarification.
What will happen if my business fails?
This is where things get tricky. If you signed personal guarantees for your business credit cards, you won’t be able to discharge those debts by declaring business bankruptcy, unless you declare personal bankruptcy, as well. Even in the case of personal bankruptcy, you may not be able to get rid of all your debts, and you may lose personal property in the process. If you’re stuck with your company’s debt, here are some things to consider:
You may be able to negotiate. Before declaring personal bankruptcy, which could stay on your credit reports for seven to 10 years, try working out a payment plan, or ask your creditor if a partial payment can be counted as “Paid in Full.”
You may be sued for the debt. If the debt is within your state’s statute of limitations and you aren’t paying up, your creditors or collectors may sue you, and in the event that the judge rules against you, your creditor may garnish your future wages or put liens on your personal property. Whatever happens, remember that you have rights. Hiring a lawyer to guide you through the legal process may help minimize your losses.
Your personal credit may take a dive. Negative information such as missed payments, delinquencies and collections accounts will likely stay on your personal credit reports for seven years, and bankruptcies can stay for seven to 10 years. This could make it difficult to get access to credit, rent an apartment or even land a job. But remember that these negative marks aren’t a life sentence. Work on rebuilding your credit, and when that bad history comes off your credit report, it will be easier to get your credit back on track.
Can I avoid signing a personal guarantee for a business credit card?
It would be ideal to keep your business finances completely separate from your personal credit, but for most small business owners, that’s nearly impossible. You’ll be hard-pressed to find a small business credit card that doesn’t require a personal guarantee, even for more established businesses. If the thought of risking your personal property makes you uneasy, you may want to consider alternatives that don’t require this agreement, such as crowd funding through sites like Indiegogo and Kickstarter.
But for most people, getting a business credit card is the easiest way to borrow money for business and establish a business credit score, and signing a personal guarantee is worth the risk. Remember, a personal guarantee will only hurt you if your company falls behind on payments. Spend carefully and only borrow what you need, and you’ll minimize your own risk while investing in your company’s future.
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