Am I Personally Responsible For My Business Credit Card?

There are lots of good reasons that you may want to get a business credit card. For starters, business credit cards offer unique rewards and perks that are specifically designed for business purchases.

Some business owners, however, are surprised to learn that they could be held personally liable for unpaid balances and debt on their business cards. This is because many small business credit cards require cardholders to provide personal guarantees.

Before you apply for a business card, you should understand what a personal guarantee is and how you, as an individual, may be liable for any balances incurred for business expenses.

What is a personal guarantee on a business credit card?

A personal guarantee is a clause in a credit card agreement that outlines your personal liability for the account. When you sign the document, you’re agreeing that the issuer can hold you responsible for paying the bill out of your own personal assets if your business assets can’t pay the debt. When searching for a business card, you’ll want to look for this clause in the fine print of the business card’s terms and conditions.

For example, the Ink Business Preferred® Credit Card has this personal guarantee clause listed in the Pricing & Terms section:

What is the difference between a business card personal guarantee and liability on your personal credit card?

When you accept the terms and conditions of a personal credit card you agree to be liable for repaying any balance you accumulate on the account. The same is true with a personal guarantee for a business credit card. If your company becomes insolvent and can’t repay the debt on the account, then you would be personally liable for repaying the debt.

The main difference with a personal guarantee on a business credit card is that you may be offered either limited or unlimited liability. With limited liability, you would only be liable for a set dollar amount for an account in default. This is typical when your company has more than one owner or partner. Unlimited liability means you’d be responsible for the full balance on the defaulted card plus any interest or fees.

Why does a business card require a personal guarantee?

Business credit cards have personal guarantees because most of these products are unsecured. In other words, there is no business collateral for the issuer to claim if the account goes into default. And since credit lines on business cards can be very high, extending the credit lines can be risky for the lender. A personal guarantee lowers that risk.

Are you personally liable for a business credit card?

You could be held personally liable for any unpaid debt on your business credit card account if the card’s terms and conditions include a personal guarantee. Depending on your card’s agreement, you could face unlimited liability, or your liability could be limited to a predetermined amount. Additionally, the issuer may report any late payments to the consumer credit bureaus, which can affect your personal credit score.

How to minimize personal liability

When you’re personally liable for your business credit card, you’ll want to find ways to minimize the impact this liability can have on your personal credit and your savings. Just like with your personal card, you’ll want to keep some tips in mind for maintaining positive credit habits:

• Don’t charge what you can’t pay: Make sure any charge you make with your business card is no greater than what you can afford to pay right away or in the near future.
• Monitor fraud or unauthorized purchases: Business cards typically include free employee cards. If you distribute cards to your employees, make sure you trust them to only make authorized purchases. Risk is high when you aren’t the only one using your card account.
• Use intro offers: Many of the best business cards have introductory APRs and welcome offers. These benefits can help minimize what you owe or give you a lump sum bonus for initial spending.

What happens if you can’t make payments on your business credit card?

In the event you stop making payments and the business credit card account goes into default, the issuer can turn to you for total repayment of what is owed — provided the card’s terms and conditions include a personal guarantee. It doesn’t matter that the charges weren’t for your own needs: You’re liable for the company’s card and the balance due.

A business card can also affect your personal credit, depending on the issuer and account. In most cases, the issuer reports your business card account activity to the three major consumer credit reporting agencies: TransUnion, Experian and Equifax. Sometimes they only report negative information, but nearly all major banks report at least that. In this situation, a business card won’t help your personal credit score since positive behavior isn’t reported, but it can hurt it.

Steps to take if you can’t repay your business card

Take action early if you foresee trouble paying your business credit card debt. Here are a few steps to help you navigate such a situation:

• Cut unnecessary expenses: Look for areas where you can cut costs in your business and minimize unnecessary spending. Direct any savings gained toward paying down your credit card debt.
• Consider a balance transfer credit card: Balance transfer credit cards allow you to consolidate your existing credit card debt — including business card debt — to a new card with a low- or no-interest introductory APR.
• Look into a small business loan: A small business loan can help you pay off business credit card debt, often at lower rates than you’d pay by carrying a balance with a business card. Compare terms and interest rates of the loan to ensure it’s the best for your business finances and goals.
• Contact your card issuer: Many card issuers offer hardship programs that may allow you to defer or delay payments, reduce your interest rate temporarily or work out a modified payment plan that fits your current financial situation. It’s crucial to reach out to your issuer as soon as possible, ideally before you miss a payment, to discuss your options.

Can a credit card company take legal action for unpaid business credit card debt?

Yes, credit card companies can take legal action against you for any unpaid business card debt. The personal guarantee on business credit cards enables issuers to sue you to recoup their losses from your unpaid business debt. With that said, they will typically do so only in extreme circumstances where the debt is substantial or late by six months or more.

Can you get a business card without a personal guarantee?

If you’re uncomfortable with being liable for your business expenses, there are a few business credit cards that do not require a personal guarantee. These are typically corporate cards, however, and require high annual revenues for qualification.

For example, the Brex Card* is not available to sole proprietors or unincorporated partnerships. It also requires more than $1 million in annual revenue, a $50,000 minimum linked bank balance, equity investment criteria or a minimum company size — making it difficult for some businesses to qualify.

The bottom line

In the end, a personal guarantee shouldn’t scare you away from getting a top business credit card. When you open any credit card, you’ll sign a contract where you’ll pledge to treat the account according to the terms outlined.

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 your account becomes seriously delinquent. But if you use a business account responsibly with on-time payments and well-managed debt, you can enjoy the positives that carrying a business card can bring — including building your business credit while protecting your personal credit.

*The information about the Brex Card has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.