Small Business Credit Cards

Personal Guarantee on Business Credit Cards

A no-guarantee business credit card is not easy to find so most business owners will have to give a personal guarantee on their business credit card. Here's how a personal guarantee works, as well as a discussion on what it takes to get a no-guarantee business credit card.

The good news is that you shouldn't have difficulty securing a credit card for your small business, even if it is a brand new, startup operation.

The bad news is that the bank will most likely require a personal guarantee before they give it to you. But wait a minute . . . What's a personal guarantee and can it substantially impact your finances outside of the business?

Just like it sounds, a personal guarantee is the attachment of personal liability to a business credit card account.

But before you get completely offended by the idea of a bank asking you to assume personal liability for a business loan, consider this: From the bank's perspective, a personal guarantee makes a lot of sense since the majority of small businesses are sole proprietorships in which the lines between business and personal assets is blurry, at best.

Even if your business isn't a sole proprietorship you may still be required to provide a personal guarantee before the bank will issue you a business credit card. Corporate entities are often required to provide personal guarantees from anyone who owns more than a quarter share of the business.

Nonetheless, it is probably still advantageous to establish a business credit card account regardless of whether or not the card issuer requires a personal guarantee. Here's why . . .

Minimal Impact

The odds of a personal guarantee significantly changing the outcome of your borrowing position and financial status are minimal, especially if you are a sole proprietor. If (God forbid) your sole proprietorship goes belly up, you will likely be held personally responsible for any outstanding liabilities anyway. Although a personal guarantee adds a degree of formality, it doesn't substantially alter the end result.

Similarly, the only way a personal guarantee can affect your personal credit rating is if you don't plan to keep up with the minimum payments. If your ability to pay the minimum monthly payment is questionable, you probably have no business applying for a business credit card in the first place.

Intangibles

In many ways, a personal guarantee amounts to personal financing and liability for your business. Yet a small business credit card offers intangible benefits that a personal credit card can't provide, e.g. a sense of legitimacy for your company. If you are forced to pull out a personal credit card for supplies and other purchases, vendors may begin to question your company's credibility.

A business card, on the other hand, communicates professionalism and reinforces the fact that your business means business. From an accounting standpoint, a separate business card also goes a long way toward keeping the books straight, regardless of how much personal liability you are assuming in the process.

Negotiation

If you are applying for a business card through your local bank, you may be able to negotiate the personal guarantee requirements. In some cases, you might be able to persuade the bank to exclude certain assets from the guarantee. But when everything is said and done, the personal guarantee will likely be a deal-breaker. If you don't agree to it, be prepared to have your application rejected. If nothing else, it may inspire you to grow your business to the point where you can get a small business credit card with no personal guarantee.

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