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On the surface, business credit cards and small business loans are obviously different products. But, when you get down to the bones, both financing solutions involve a lender trusting a borrower to repay their debt. That’s why your small business loan often requires collateral to secure. And that’s why, whether you know it or not, signing up for a business credit card most often means signing a personal liability clause.
To feel comfortable extending you credit, the vast majority of business credit card issuers need some kind of guarantee that they’ll make their money back—no matter what. That’s the purpose of a personal liability clause. And, as the primary cardholder, agreeing to a personal liability clause puts your own coin purse up for grabs if your business can’t pay up.
Personal liability is simply standard practice, despite its admittedly threatening tone. And despite our assurances that personal liability isn’t actually personal, you might still be wary of running into that contingency plan—and we get that.
We’ll tell you exactly what you need to know about your business credit card’s personal liability clause, how not to incur that personal liability clause, and even how to get out of a personal liability clause entirely.
Personal liability means that you’re personally responsible for paying off your business credit card debt in case the primary payer—aka your business—can’t.
It’s a type of small business loan collateral that mitigates your creditor’s risk. If the worst-case scenario occurs, and your business falls behind on their credit card payments, the credit card company can leverage that personal guarantee and seize any and all of your personal financial assets to recoup that missing debt.
That personal liability is why you’ll be prompted to fill in personal information, including your Social Security Number, on your business credit card application. It’s also why the card issuer pulls your personal credit score during the underwriting process; in addition to looking over your business’s credentials, your card issuer needs to determine whether you, as the guarantor, are financially able to repay your credit card bills in case your business can’t.
You’ll find your business credit card’s personal liability clause within the fine print of your card’s terms and conditions.
The language indicating personal liability may include:
and a few other variations, too.
These terms all mean slightly different things regarding whose assets the card company has the right to seize: For instance, “individually and jointly with the Company” means the creditor has the right to go after both, or either, you and your business to make up for those missing bills. If you’re confused or concerned about the specifics of your card’s personal liability clause, it’s always best to contact your card issuer directly.
Also, be aware that business credit card personal liability applies to all business entities: Although registering your business as certain legal entities (like LLCs, S-corps, and C-corps) will protect your personal assets in case of lawsuits, it can’t protect your assets from a signed personal guarantee.
Also note that a personal guarantee holds even after declaring bankruptcy, so you’ll stay on the hook until you personally repay your business’s debt, even if your business shutters.
If you’re worried about personal liability on your business credit card, that probably means you’re worried that your business won’t be able to repay your credit card bills—which would then give the card issuer cause to incur that personal liability clause, which would then require you to pull funds from your own pockets to satisfy your debt.
The best way to allay the fear of financial insolvency is to use your business credit card wisely. (And make sure you don’t have the wrong business credit card in the first place.)
At its most fundamental level, responsible card usage means only charging expenses to your card that fit within your budget, that won’t max out your card, and which you can comfortably repay within your card’s billing period. Ultimately, if you repay your credit card bills in full and on time, then you have no reason to fear your card’s personal liability.
Here’s how to make sure you don’t default on your payments:
If you need to fund a large purchase—like a new piece of equipment, a cohesive marketing plan, or a big batch of inventory—resist the urge to charge that investment to your credit card.
Charging a considerable expense all at once may draw you dangerously close to, or even surpass, your credit line, which would then spike your credit utilization ratio—and, in turn, lower your credit score. And if you can’t repay that expense within your card’s billing period, you might risk defaulting on your payments and activating your card’s personal liability clause. (Or, at the very least, you’ll end up paying a ton in interest on your balance.)
None of those options sound good. So, instead of relying on your business credit card for extra-large purchases, apply for a small business loan that’ll front you enough cash to purchase what you need, and which you can take your time paying back in regular installments.
If your credit score is a concern, and if you want to avoid signing a personal liability clause, consider applying for a self-collateralized loan. Since the collateral is embedded in the loan itself, lenders won’t require an additional personal guarantee in the loan’s terms. Rather, if a borrower defaults on their loan payments, the lender will simply seize whatever they’re financing to recoup their debt. For that reason, self-collateralized loans are much less risky for lenders than unsecured loans (or business credit cards), so they’ll generally accept borrowers with lower credit scores.
In particular, you might want to consider the following types of collateralized loans:
If your business needs equipment to thrive—like vehicles, restaurant supplies, machinery, or computers—then an equipment loan might be the right financing option for you. If you’re approved for this loan, a financing company will front you up to 100% of the cash you need to purchase that equipment, and you’ll pay off your debt, plus interest, in regular installments.
Invoice financing is an ideal financing solution for businesses whose cash is tied up in outstanding receivables. A financing company advances you a lump sum of cash, usually in the amount of about 85% of the value of your outstanding invoices. They’ll use those invoices as collateral, and charge additional fees on the remaining 15% until your customers pay off their invoices.
If you’re concerned about your ability to repay your credit card bills from month to month, you should first ensure that you’re only charging the expenses that truly fit into your monthly budget. (If you’re wobbly on budget design, get business accounting software to help you out. You’ll also find cash-flow forecasting useful.)
And if you do carry a monthly balance, you might end up paying an arm and a leg in added interest, which further strains your budget—and brings that personal liability clause dangerously close to kicking in.
Even still, your business credit card may be the easiest way to pay for large expenses, so long as they fit beneath your credit line. After all, one of the reasons for using a business credit card at all is for its ease and flexibility.
So, if you anticipate making a large purchase on your credit card within the first few months of ownership, use a 0% intro APR period credit card to do it. The indicated 0% intro APR period gives you an added cushion to pay down big expenses without incurring huge amounts of interest, and you’ll feel more confident in your ability to hit the payment deadline.
The American Express Blue Business Plus credit card has one of the longest 0% intro APR periods on the market: 12 months, to be exact. After this period is up, your APR will set in at a rate that will vary with the market Prime Rate, so be sure to see the issuer’s terms and conditions for the latest APR information.
In effect, that means you’re getting a 12-month, interest-free loan with this card. That leaves you plenty of time to pay down large expenses, without worrying about defaulting and risking its personal liability clause.
As the primary cardholder, your personal guarantee renders you responsible for all spending activity across all of your cards. That means you’re responsible for the spending habits of all your card’s authorized users, too—even if they go a little (or a lot) overboard. For that reason, you should only allow your most trusted employees or business partners to become authorized users.
But if you need to allow several employees to use a corporate card, and you need to be absolutely certain that they don’t overspend, consider the Bento for Business card. Technically, Bento is a prepaid business debit card, so a card company doesn’t assign you a credit line, and you don’t pay off a monthly balance. Rather, you’ll create your Bento’s credit line by transferring funds from your own business bank account and onto the card. Of course, that means you can’t build credit with your Bento card, but you’ll also skirt a credit card issuer’s personal liability clause.
But the Bento really shines in its employee-spending management capabilities: Through the card’s app and dashboard, you can easily create new cards, set spending limits on each card, oversee and manage all card activity through customized reports, and readjust spending limits accordingly.
→TL;DR (Too Long; Didn’t Read): To avoid incurring your business credit card’s personal liability clause, make smart spending decisions: Don’t charge huge purchases to your card, pay off your balance every month, and use a card that allows your employees to safely spend within your budget’s limit.
Now that you know what it is, you can understand why so many small business credit cards include a personal liability clause. But we can also understand why the thought of risking an unknown quantity of your personal assets in pursuit of small business financing is… a little scary. (That’s part of the appeal of unsecured business loans, after all.)
In truth, it’s hard to come by a business credit card that doesn’t require a personal guarantee from the get-go. However, we can show you some tactics to try out to dodge a personal liability on either a new card, or on your existing business credit card.
If you’re currently using a business credit card with a personal guarantee, you can certainly try contacting the card issuer and asking them to waive that guarantee.
Do be aware, though, that your business will probably have to meet a few standards in order for your card issuer to scrub out a liability clause. Remember, that personal liability is the card issuer’s safety net, which protects them from losing their money in case the primary payer is unable to repay what they owe. So, they’ll only be willing to forgo that safety net if they’re confident that the primary payer is financially secure enough to repay their credit card bills in full, and on time, every time.
As such, card issuers are generally more trusting in larger, established businesses that generate a healthy revenue, make a profit, and have a proven track record of consistently repaying their credit card bills. If that sounds like you, you might have the stats your card issuer wants to see to let you off the hook from your personal guarantee.
If you’re on the market for a business credit card with no personal liability, make a bank your first stop. That is, make a bank with whom you have a pre-existing relationship your first stop.
Banks encourage customer loyalty, so they’ll usually offer added incentives alongside their financing products, like their business bank accounts. One of those incentives may be waiving personal guarantees on credit cards for the customers with whom they already do business.
That makes sense from the bank’s perspective. If you’re a strong customer, then the bank already has the evidence that proves you’re responsible with your financial obligations. With that proof in hand, your bank is less in need of the additional safety net of a personal guarantee—they already know your business can handle debt.
If you’re truly intent on forgoing a personal liability clause on your business credit card, getting a secured business credit card may be your best option—they’re pretty much the only business credit cards whose terms don’t contain an out-and-out personal liability clause. Instead, a personal guarantee is inherent to the card itself.
Secured credit cards are collateralized (hence, secured) by the cardholder’s own cash deposit, which then acts as all, or most, of the card’s credit line. And if the cardholder defaults on their payments, then the card issuer will just use that original deposit to recoup the debt.
That all means, of course, that you’re using your own money to create your credit line on a secured credit card—but it’s money you already have, so you don’t need to fear scraping your reserves clean to repay a failed business’s debt down the line, which you might if you’d signed a personal guarantee.
Secured business credit cards are hard to come by, so if you’d like to try out this financing method, you can consider signing up for a personal secured credit card that you only use for business expenses.
Because of that easily-seized collateral, card issuers are more willing to extend secured credit cards to borrowers with lower credit scores. Consider the Capital One Secured Mastercard, which may approve customers with sub-550 credit scores. Capital One also reports to all three personal credit bureaus, so you’ll definitely boost your personal credit score if you use this card responsibly.
Secured credit cards are really the best option for building credit, because they don’t provide the perks, advantages, flexibility, and spending power that unsecured business credit cards (with personal guarantees, that is) do. So, if your credit score is high enough to qualify you for an unsecured business credit card, it’s may be worth signing that personal liability clause—that way, you’ll truly reap all the benefits a business credit card has to offer.
→TL;DR: Your card issuer may waive your card’s personal liability clause if your business has evidence of financial solvency and responsibility. If you’re seeking a new business credit card with no personal guarantee, try getting a card with your bank or, if your credit score is challenged, a secured business credit card.
When you agree to a personal liability clause in your business credit card’s terms, you’re essentially agreeing to become your business’s co-signer: In the event that your business defaults on its payments, you’re allowing the card issuer to go after your personal assets to compensate for that debt.
That personal liability clause is the only way for the card issuer to ensure, legally, that their financial solvency isn’t contingent on their borrowers’. And that makes finding a business credit card without a personal liability clause pretty difficult.
But if your business has a strong history of credit repayment, you can try contacting your card issuer and asking if they can waive your card’s personal guarantee. Alternatively, you can leverage the strength of your business’s banking relationship to get a card with no personal guarantee, or opt for a secured credit card, which doesn’t have a personal liability clause at all (but which does limit your spending power).
Ultimately, though, you shouldn’t have any reason to fear your business credit card’s personal liability clause, so long as you’re using your credit card responsibly. For the most part, that means spending well below your card’s credit limit, paying your bills in full and on time, and monitoring account activity across all your cards. And if a potential expense threatens to throw that responsible-usage plan off kilter, it may be best to find an alternative financing solution, or a business credit card that better suits your needs.