'Joint and several liability' clause shares business debt risk
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Dear Your Business Credit,
I am the owner of a small limited liability electrical company. I would like to apply for a business credit card where there is zero to limited personal liability. Do you have any recommendations? -- Alexei
Generally speaking, it is very difficult to obtain a credit card for a small business where the owner has zero liability. Larger businesses can get cards that offer "commercial liability," meaning the company is responsible for the debt. However, as you may already have discovered, small-business credit card issuers typically view the company's finances and the owner's as one and the same. They require the owner to personally guarantee the debt.
You didn't mention your revenues. If you are breaking the $1 million revenue mark, a card I discussed in a previous column may be worth exploring. It is the Bremer Bank Visa Signature Business Company Card, available to established medium- to large-sized incorporated businesses, LLCs or LLPs with annual sales between $1 million and $10 million and minimum annual net income of $350,000 in each of the previous two years. The bank's website says no personal guarantee is required.
Some small-business cards offer "joint and several liability," in which the signer shares responsibility with the business. I looked at the terms and conditions for several small-business credit cards to find some where the liability is shared. Among them are Capital One Spark Cash for Business card, the Chase Ink Plus card, the American Express OPEN Business Gold Rewards card and Bank of America's Cash Rewards for Business MasterCard.
However, sharing responsibility does not absolve you personally of debts on the credit cards. Let's say your business can't come up with the money owed to a card issuer. When there is joint and several liability, the issuer also has the option to go after you personally.
Before you apply for any credit card, I'd strongly encourage you to think about why you do not want to be personally liable for your firm's credit card debt. Are you worried that your firm is shaky and may not be able to pay it back? If so, that may be a signal you need to work on your firm's cash flow and build cash reserves. Cash flow in a contracting business can be a complicated area, but once you build the habits that keep cash flow healthy, your business will be much stronger. You will be able to use credit in a way that does not put your own financial future at risk.
Electrical Contractor magazine has published an excellent three-part series on improving cash flow that may be helpful. I would strongly encourage contractors in this field to read all three parts. I've spoken with some home improvement contractors who found it useful to work with a business coach to improve cash flow. Small changes in how you handle procedures such as giving estimates, collecting deposits and invoicing can make a huge difference in the long-term future of your business and reduce your need for "emergency" credit.
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