One thing any small business needs to be successful is financing and a business credit card can help to fill in the gaps in your cash flow.
Aside from being a convenient way to cover necessary business expenses these cards are an invaluable tool for earning miles, points or cash back, which can benefit your bottom line.
Maintaining a separation between your business and personal finances is a wise rule of thumb for any entrepreneur but when it comes to business credit cards, it’s often easier said than done.
That’s because many banks require you to offer a personal guarantee before they’ll approve you for a line of credit.
While it’s possible to get around this requirement, it’s not exactly easy to do. Read on to find out how you can qualify for a business credit card without putting your personal finances on the line.
What is a Personal Guarantee?
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A credit card is an unsecured debt, which means no collateral is required to get one. If you end up defaulting, there are no physical assets the bank can claim to recoup the loss.
A personal guarantee acts as a safety net of sorts by making you and not your business personally liable for any balance you rack up on the card. It’s similar to what happens if you co-sign a loan for someone and they don’t pay. In that instance, the bank would also turn to you to pick up the tab.
How it works
If you’re taking out a loan, you may have to sign a separate document for a personal guarantee but it works a little differently with a business credit card. When you apply, the bank uses your Social Security number to approve you. If you read the fine print closely on your card agreement, you’ll likely see a sentence or two under the Schumer box that states what your liability is.
To give you an idea of what the personal guarantee looks like, here’s an excerpt from the cardholder agreement for the Chase Ink Plus Business card:
If your business fails and you’re not able to pay the card off, the bank has the option of suing the business and/or you personally. If they win their case, they could take additional steps to garnish your wages, seize funds from your business or personal bank accounts or put a lien on your property. That’s why it’s to your advantage to try and avoid the personal guarantee requirement when you’re applying for a business credit card.
Qualifying For A No Guarantee Business Credit Card
Getting a bank to agree to offer you a business credit card without requiring a personal guarantee is tricky but it’s doable if you know which steps to take.
Step 1: Build a relationship with your bank
When banks extend credit to a business, they’re assuming a certain amount of risk. If your business is relatively new, the bank has no way of knowing how profitable it’s going to be, which is where the personal guarantee comes in.
Establishing a solid relationship with your bank can work in your favor as far as dodging the personal guarantee requirement goes. One way to do that is by handling your business bank accounts wisely.
As long as you’ve got a steady stream of cash coming in and that you’re maintaining a healthy balance, the bank is going to see those as positive signs that your business is doing well.
Getting to know the people you’re banking with is also to your advantage, especially if your accounts are with a smaller regional bank. The more personal connections you make, the more trust you’re likely to build. If the people who make lending decisions are familiar with you and your business, they may be more likely to let you off the hook for a personal guarantee when you need a credit card.
Step 2: Incorporate your business
A personal guarantee is almost always required if you run your business as a sole proprietorship or partnership. Any credit cards or loans you apply for are going to be based on your Social Security number, which means you’re responsible for any debts owed by the business.
Incorporating creates a legal and financial distinction between you and the business. Organizing your company as an S-Corp, C-Corp or Limited Liability Company can offer you some protection against lawsuits if your business defaults on a debt. It can also put you one step closer to getting a business credit card without a personal guarantee.
Step 3: Establish a business credit file
Once your business is incorporated, you can begin building a separate credit history that isn’t tied to your personal score. Business credit reporting is handled by a number of organizations but the most well-known is Dun & Bradstreet. To establish a credit file, you’ll need to register for a free DUNS Number, which is used to track your credit history.
The key to building good business credit is to work with suppliers that report to D&B. As information about your open lines of credit and payment history comes in, it’s used to calculate your Paydex score.
This score is based on a weighted average and the higher your score, the better credit terms your business will qualify for. Paying your bills promptly, starting with the largest invoices first can help drive your score up. Ideally, you should aim for a score of 80 or higher, which is roughly the equivalent of a 720 FICO score.
Each of the three major consumer credit reporting bureaus (Equifax, Experian and TransUnion) also offer credit reporting for businesses. It’s important to note, however, that all three use scores that are based on their own proprietary models so you’re likely to see a lot of variation compared to your Paydex score. The Paydex score also carries more weight where banks are concerned.
Step 4: Meet the requirements for no guarantee cards
While they’re not as common, there are several business credit cards on the market that don’t require a personal guarantee if you’re able to meet certain guidelines first. Typically, the bank’s going to look at several factors to determine whether you qualify, including:
- How long you’ve been in business
- Your business structure
- Your business credit history
- How large your company is
- Your annual sales
For example, the Sam’s Club Business MasterCard doesn’t require a guarantee for incorporated businesses that have been around two years or longer, have more than 10 employees and generate $5 million or more in sales each year.
Bremer Bank offers a no-guarantee Visa Signature Business card for LLCs and LLPs that bring in between $1 million and $10 million in sales each year and have a minimum annual net income of at $350,000 for the two year-period prior to applying.
Obviously, these cards and others like them are only going to be suitable for established businesses. If you haven’t been in business that long, you may not be able to avoid a personal guarantee initially but you’re not necessarily locked into it forever.
Getting a Personal Guarantee Removed
Asking the bank to remove a personal guarantee for an existing credit card account is a gamble but it can pay off if you’re successful. The most important thing to consider before you make the request is what the bank’s going to be looking for.
Specifically, the bank’s going to want to see that your business and personal credit ratings are in great shape. That shouldn’t be a problem as long as you’ve been making your payments on time and keeping your credit utilization at 30% or less.
If the bank isn’t quite convinced, you can strengthen your case by providing copies of financial statements that show what kind of assets the business has and what your monthly cash flow is. Essentially, the bank wants to be reassured that the personal guarantee really isn’t necessary so the more evidence you have, the stronger your argument will be.
Some banks require a personal guarantee as a matter of policy, no matter how good your business or personal credit. Don’t be discouraged if your request gets turned down for this reason but do keep an eye out for business credit cards you can qualify for without offering a guarantee.
Options For When You Have Poor Personal Credit
Getting approved for a business credit card might be completely out of the question if your personal credit is less than stellar, regardless of whether a personal guarantee is required or not. In that scenario, you’re going to have to do a little more legwork to establish credit for your business.
Create partnerships with the right vendors
The first option is to begin building credit with suppliers and other businesses that don’t require you to have a Paydex score or offer a personal guarantee. There are a number of office supply vendors, for instance, that extend credit to new businesses without an established credit file.
There’s something of a catch, however, since these kinds of vendors may require you to prepay for your first order or offer you a small credit line to start. It’s possible, however, to increase your line of credit or get more favorable terms if you’re consistently making your payments on time.
Apply for a small bank loan
If your business is bringing in a continuous flow of profits and you’ve built up some cash reserves in a business savings account, you may be able to leverage that to get a loan from your bank. Offering up your savings as collateral may persuade the bank to grant you a small loan.
As long as the bank reports your payment activity to Dun & Bradstreet or any other credit bureaus you’ve registered your business with, you’ll be helping to improve your credit rating over time. Once you’ve shown that you can repay smaller amounts, the bank may view an application for a business credit card with no personal guarantee more favorably.
Consult the Small Business Administration
The Small Business Administration doesn’t grant small business loans directly but it does guarantee loans offered by participating lenders. If you’re striking out when approaching banks for a loan directly, the SBA can point you in the right direction as far as finding a lender that’s willing to play ball.
Banks that grant SBA loans tend to be a little more rigorous when it comes to the kind of requirements you need to meet to qualify. For instance, you’ll have to prove that your business is profitable and be able to show profit projections for the long-term. A detailed business plan is a must and that’s something the Small Business Administration can help with if you don’t have one.
Look for loans online
The Internet has given birth to a whole slew of lenders that operate entirely online and some of them are geared towards to helping small business owners. Typically, you can get loans for smaller amounts, although some online lenders offer loans of up to $500,000.
When you’re researching online business loans, you need to be clear on what kind of platform you’re dealing with. For example, a peer to peer lender like Lending Club is going to have different borrowing guidelines than an online bank. The fees and interest rates may also be higher when you’re going through a P2P lender.
If you have an eBay business, you may be able to tap into PayPal’s Working Capital program. There’s no credit check to qualify; instead, PayPal uses a special algorithm that looks at your eBay sales and PayPal transactions to determine how much money to lend you. As payments come into your PayPal account, a small percentage is deducted towards repayment of the loan. SquareCapital is a similar option for online business owners.
Aside from the interest and fees, the other thing you need to keep in mind when considering online or alternative lender is how they report your account activity. You want to make sure that your payments and loan balances are showing correctly up on your business credit profile.
Personal guarantees are designed to protect the bank against potential future losses by shifting all of the risk onto the business owner’s shoulders.
Avoiding them whenever possible is in your best interest if you’re not comfortable with the financial implications they carry.
Establishing separate credit for your business and maintaining a healthy bottom line are the two most important things you can do to improve your chances of getting approved for a business credit card without a guarantee.