Risks of getting a credit card with a business partner
By Elaine Pofeldt
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I run a
small business with a 50-50 partner. We are thinking of applying for a business
credit card. I have never asked my
partner about his credit score. If our application were to get rejected, would
that hurt my credit score? And if we got a joint card and my partner were to
misuse the card, would that affect my credit? -- Worried
to ask these questions now -- before you apply.
If you and
your partner seek a business credit card together and the application gets
rejected, it won't have much of an effect on your credit score, according to Leslie
Tayne, an attorney based in Melville, N.Y., who works with small businesses on
issues related to debt and credit. "It's a minor hit," says Tayne.
exception is if you apply for multiple credit cards, and credit bureaus see
multiple inquiries on your credit history at around the same time. That could
cause a more significant dip in your score, albeit a temporary one.
there are bigger risks in this situation. The real minefield is tying your
credit to each other's.
You have several options in the way you sign up. You can have joint credit -- which makes both of you responsible for the debt -- or one of you can be the main applicant with the other one added as a co-signer or authorized user. A co-signer is a guarantor for the debt and may or may not have access to the credit. An authorized user is not responsible for repayment of the debt but has access to the credit.
No matter which option you choose, the bank will require at least one of you to provide a personal guarantee that the debt will be paid. "Whenever you put a card
in a company name, generally someone has to personally guarantee it and is able to
get other cards in other names."
If you provide a personal guarantee, the handling of the card's debt is reported to the credit bureaus and affects your personal credit history, though typically not as much as a personal card would.
matter if your partner covers a certain portion of the bill. That's between the
two of you. The credit card issuer will still pursue the signers on the account
if it doesn't get paid. If you happen to be married, an unpaid bill could
affect your spouse's financial situation, too. Applying for a loan as a married
couple will be much harder if your credit score is in the basement because of
something your business partner did.
go wrong? In a worst-case scenario, your partner could go on a spending binge, run
up a big bill for personal expenses he can't pay, quit the business, ignore
your calls and emails, and leave you with the tab. That's pretty unlikely. But
even if there's no drama, you could still put your credit score at risk. Say
you and your partner decide that he will write the monthly check to pay off
your joint credit card balance, but he turns out to be forgetful and makes a
payment very late. Depending on how tardy it is, this could affect your credit
history. "When you go
into business, you can't control another person," notes Tayne.
it is possible for each of you to open separate credit card accounts in the name of the business, for which
you are individually responsible, she says. Doing
this separately will still enable you to start building up a credit history for
note that Tayne advises would-be business owners against going into business
with anyone whose credit score they don't know. We all have heard of business
partnerships that have gone awry after a good beginning.
If your partner has a
low credit score, it doesn't mean you should avoid doing business together. It's
possible he just hasn't used credit much in the past. However, it may point the
way to red flags, so it's always good to have an open discussion about any background
issues going on in your lives that may affect the business -- before you form an
LLC or incorporate.
See related: In case of default, business credit cards get personal
, 10 ways business credit cards are different
, 5 things you should know about business credit scores
Elaine Pofeldt is a journalist who specializes in entrepreneurship and careers, contributing to publications such as Fortune, Money, Working Mother and many others. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals.
Elaine answers a question about small business and credit from a CreditCards.com reader each week.
Send your question to Your Business Credit.
Published: January 28, 2013