Am I on the hook for my business's credit card debt?
If you, as business owner, signed a personal guarantee to get your card, you're liable
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. Her book, “The Million-Dollar, One-Person Business,” was released in 2018. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
If my company closes, am I still liable for the business card debt?Most credit card issuers require the business owner to sign a personal guarantee, meaning you're responsible for the debt no matter what happens to the business.
Dear Your Business Credit,
I am applying for a U.S. Bank NAGC (National Association of Government Contractors) business credit card. I am wondering if my company goes out of business, am I personally liable to pay the debt? The company is incorporated as an S Corporation. – Thomas
Glad to hear you are applying for a business credit card. That is an important step toward building business credit.
I was not able to access the application form for the credit card you mention online – I kept getting an error message on that page (so check to be sure U.S. Bank still offers th NAGC card) – but chances are you will be responsible for the debt, regardless of the fate of your business. Most small-business credit cards require a personal guarantee.
To be certain, read the fine print of the application you are completing to see if you are being asked to guarantee the debts on the card. If you are signing a personal guarantee, then you must pay back the debt if the business closes.
Running any business is risky, but if you are seriously worried about your company closing, I’d proceed very cautiously on putting charges on the card. Don’t run up more charges than you can personally pay back now. It’s no fun to pay down debt from a business that didn’t work out. Pay for as many of your purchases as you can with the revenue you bring in.
Using credit can help you conserve cash on hand, but I would not advise using it if you know you can’t pay back your debts. Bear in mind that if the business is your main source of income and it closes, you’ll be in a situation in which you have to find a job or start another business.
Hopefully, it won’t come to that and your business will succeed. One step you can take right now to make sure your business thrives is to keep a good handle in your finances. Find an accounting software you like – whether it is QuickBooks, FreshBooks, Xero or another one – and learn how to use it, so you can tell how your business is doing at any given time. That way, you’ll be alert early to any cash-flow challenges that are emerging and can course-correct before they get worse. Also learn how to do cash-flow projections.
Once you get your business credit card, make the most of it by paying your balance on time. Don’t max out your card, because high credit utilization can hurt your credit profile.
Make sure your usage of business credit is being tracked by the major credit bureaus. For information on how to do that, see my earlier column, “How to check a small business’s credit report.” One key step is getting a federal Employer Identification Number (EIN), which the credit bureaus will use to identify your businesses. Be sure to get listed with Dun & Bradstreet by applying for a free nine-digit DUNS number through the site.
In the meantime, take other steps to bolster your business credit, like opening a business checking account and establishing trade credit with stores you patronize for office or business supplies. Good credit can be a powerful tool for growing your business if you protect and nurture it.
Tip: Read the fine print of the business credit card application you are completing to see if you are being asked to guarantee the debts on the card. If you are signing a personal guarantee, then you must pay back the debt if your business closes.
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