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Pros & Cons of Personally-Backed Business Credit Cards

18 July 2012 by

Pros & Cons of Personally-Backed Business Credit Cards

Credit card issuers will look at both your personal and business credential when considering you for a small business credit card. This gives them a better idea about your overall liability.

Most small business owners would probably agree that a business credit card is a smart and strong way to provide financial flexibility to their business. It aids in tracking spending, monitoring transactions, accounting, and, of course, tax records for small and large businesses alike.

Of course, the presence of this credit record also gives potential lenders a look into what kind of credit liability you might be if they were to lend to you. Because of this, business lenders will still ask a business owner for their social security number before approving their application. This allows them to look at not only your business’ financial aspect but also your personal credit integrity as well.

This is something that can be extremely helpful for anyone may be starting a new business and therefore does not have very strong business financial credentials. A strong personal portfolio helps to soften the appearance of risk so that lenders are more willing to approve a new account. Of course, a poor personal financial profile tells lenders that your business exploits might follow suit, which will make them much less likely to lend.

Bob Falkenberg, senior vice president at Wells Fargo Small Business Credit Cards, said:

When we approve a [business card] for a customer, we lend to the business entity, and we inform the customers that we require a personal guarantee. By having the small business owner personally guarantee the credit, we provide credit to many more businesses that would otherwise not have been able to qualify based on the strength of their business financials alone.

Indeed, American Express, Chase bank, Capital One, and, of course, Wells Fargo, are all in the habit of doing this and it seems to be working for them.

Actually, many credit cards make it quite clear what their intentions are in regards to checking credit if you simply read their terms and agreement listings. While it should be obvious that you are personally responsible for your credit, these are words that are present in every set of terms and conditions you will find. For example, the Capital One Spark Business Card states that the applicant will “agree to be individually, jointly, and severally responsible for all charges.” Capital One spokeswoman Alison Cahill-Rouse reports that

We do weigh personal credit more [when] the business has less of a track record.

The Ink Card, from Chase bank, simply requires new applicants to check a box at the top of the application that signifies the applicant is aware he or she “will be liable, both individually and jointly,” for paying the account balances.

Obviously, these requirements are somewhat acceptable for new businesses who are trying to earn stable financial groundings but do not have the security of a strong credit history. They are also reasonable provisions for secondary or auxiliary businesses that might not be focused primarily on making a significant amount of money. Of course, there is a down-side too, as director of national priorities for Consumer Action, Linda Sherry, points out:

The card issuer could come after a person’s personal assets even if the business declared bankruptcy.

Finally, it is important to note that there may be another consequence to this action: consumers may be more at risk of abusing these personally-backed credit products instead of using them solely for business purposes, which might lead them to question their necessity altogether.

Adam Fingersh, a senior vice president of Experian’s Business Information Services says

Business owners might wonder if it’s worth the hassle… but establishing accounts in the business’ name, is the beginning stage of separating your personal and commercial credit.

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