Cut personal credit ties to a failing business
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Dear Your Business Credit,
I am the president, but not an owner, of a failing corporation. I am the guarantor for three business credit cards with zero balances but with substantial credit limits. How may I close the accounts without having a negative impact on my credit score? -- Robert
I'm sorry to hear about your company's troubles. The past few years have pushed many small businesses to the breaking point.
Your first priority should be to close to those cards -- as soon as possible. Having those cards in your name brings you tremendous personal liability, says David Sussman, CEO of Valcor, an Anaheim, Calif.-based consulting firm that advises troubled small businesses and midsized firms on matters such as debt mediation, restructuring and raising capital.
You have taken on a financial responsibility for a company at which you do not have complete control over financial decisions. Although you are president, the owner is ultimately in charge.
While you may know and trust the owner, it is hard to predict what someone will do under the pressure of losing a business. That opens you up to a lot of financial risk. "The psychology of the business owner when the business is failing is not dependable or reliable," says Sussman.
Sussman has seen many an otherwise rational owner, after a string of sleepless nights, make a sudden, last-ditch effort to save the business. If the owner decides to charge up those credit cards with a $150,000 marketing campaign, and the company ultimately fails and files for bankruptcy protection, you will still be on the hook personally for that debt as the guarantor, he says.
Typically in such cases, says Sussman, "The company closes down, the owner says, 'I'll help you,' -- and nothing ever happens." Assuming you don't have the cash on hand to pay whatever charges have been made, you may be forced to live with ruined credit for years to come.
To prevent this, tell the owner immediately that you are no longer comfortable keeping the cards open in your name because you are worried about your personal credit. That way, he or she has a chance to open new cards, advises Sussman. "The owner needs to have his own lines of credit for the business," says Sussman.
This may be an uncomfortable conversation, so you will need to go into it with resolve. If you guaranteed the cards because the owner had poor credit when starting the company, that was a very generous act in itself. Remind yourself that you are under no obligation to go down with a sinking ship. You need to be able to keep a roof over your head in the future, and that could be difficult if your credit is ruined.
Once you have notified the owner that you are closing the cards, don't wait. In Sussman's experience, the business is at the point where owners typically start making very bad decisions. Put your own interests first here and call the card companies today to close the cards.
As to whether closing the cards will affect your personal credit, that depends on what other cards you have open and how much of your credit you are utilizing. If you have other credit cards in your name, the credit score impact of canceling the company's cards should be minimal.
Even if these are your only cards and closing them does have some impact, it's important to weigh that against the alternatives. You can easily rebuild an excellent credit score by opening new cards in your name and handling them responsibly. However, you won't have a prayer of doing that if the owner, with nothing left to lose in the business, unexpectedly starts running up charges you can't pay.
I'd like to close with a word of advice for anyone asked to provide credit for a business being launched by a friend or significant other: Find another way to show your support. It is not uncommon to help out in this way -- and then, after the startup fails, to spend years living on a shoestring to pay off the debts that the entrepreneur has long since forgotten. If you truly want to provide financial help, give cash or donate services the entrepreneur needs. Don't give anyone -- especially someone with a poor credit profile -- a blank check with your credit.
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