Business Credit Cards Without Personal Guarantee

Monday, June 11, 2012 at 3:50pm by Site Administrator

No Personal Guarantee: Why so Elusive?

 

A business credit card can open up tangible and intangible benefits for your company. Most business credit cards are designed specifically to help a business grow. They provide incentives that match your company’s needs and have rate plans that make sense for a company structure. The intangible benefits include the ability to make purchases with a card that lists the company name rather than an individual, which lends the company more credibility. Even though the card is issued in the name of the company, banks almost universally require that one person from the company to provide a personal guarantee as part of the credit application. That person is generally an owner or a member of the board of directors.

 

How a Personal Guarantee Works

When you sign a personal guarantee for a business credit card, you are basically backing up the bank’s loan with your own personal collateral. If the business cannot make a payment or defaults on the loan, the bank will look to your personal accounts to make up the difference. If you are the owner or partner in an LLC or corporation, your assets are most likely already attached to the business. Agreeing to a personal guarantee on a business credit card would not make a big difference in your personal liability in the long run because you are already liable for the business accounts anyhow.

 

Small Business Owners Sometimes Blur Personal and Business Expenses

One reason banks prefer a personal guarantee from small business owners and sole proprietors is because it is so easy for the business owners to blur the line between personal spending and business spending. The business credit card is a good way to try to separate the personal from the business, but there may be times when personal assets are acquired through the business credit card. If there is a personal guarantee attached to the card, the bank can recover any losses that might have occurred due to personal spending.

 

The Guarantee Provides Security for the Lender

The main purpose of a personal guarantee is to protect the bank’s investment. Although your credit rating plays only a small part in the approval of the business credit card, your personal assets are seen as available to the bank if the card is defaulted on by the business. The guarantee gives the bank a fallback position and additional legal avenues to pursue the money your company owes them if there is ever a problem, which makes it easier for the bank to loan the money in the first place.

 

Personal Liability Protects the Bank From Fraud

Your business is most likely above board and beyond suspicion, but not all businesses are. A personal guarantee attached to a business credit card protects the bank if it is found that a corporation was formed solely as a sham operation that is really operated and profiting an individual on a personal level. The bank can recover any loan that it makes through the credit card even if a business is discovered to be fraudulent as long as there is an individual attached to the account. Fraud is not the first reason banks impose personal guarantee requirements, but it is an important tool they can use to protect themselves.

 

Lack of Personal Guarantee Throws Suspicion on Business Prospects

If you are unwilling to personally guarantee a credit card for your business, the lender may be uncomfortable about your expectations for the business. The personal guarantee is a sort of practical way to show that you are optimistic that your company will continue to do well and have no trouble making payments or meeting the terms of the credit card. The guarantee provides a level of comfort for the lender because it indicates that you believe your company is strong enough to cover the debts you may incur and you are willing to stake your own personal assets.

 

Personal Guarantees can be Negotiable

You may be able to negotiate the terms so that they are more comfortable for you and still acceptable to the bank. For example, the bank may agree to only include specific assets in the guarantee rather than all of your assets. Some smaller lenders may waive the personal guarantee requirement entirely in certain situations. It can be uncomfortable to tie your personal assets into your business assets, but sometimes there is no way to avoid it. The best you can do is negotiate a deal that works for both you and the lender.

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