Understanding Business Credit Card Personal Guarantees: Risks & Implications

Millions of Americans own their own businesses, and each one of them can potentially qualify for a small business credit card. Small business credit card holders need to be aware that they are personally liable for repayment of their charges, but what does this mean?

What your personal guarantee means

Your small business may be incorporated in different ways, or it may just be a sole proprietorship. But regardless of your company's legal structure, you will almost always be personally liable for the charges on your business credit card. (See also: When You Should Get a Business Credit Card Over a Consumer Card)

Wording in the card's terms and conditions will usually state that both the business and whoever signed for the account are liable for all transactions made with all cards (including those of authorized users) and convenience checks on the account. It may also say that if you leave your company, you will continue to be responsible for outstanding balances on the account. (See also: How Small-Business Credit Cards Affect Your Personal Credit)

These personal guarantees mean that you will always have to pay the charges on your business credit card account. You can't claim that you aren't responsible for paying the charges of your business partner or your employees. You can't say that the debt is part of "the company" and that you no longer work there. In short, you are just as responsible for all of the charges to your small-business credit card account as you would be if they were made by you on your personal credit card. (See also: Best Credit Cards for Small Businesses)

There is a type of business card that doesn't require a personal guarantee, but that's a corporate card designed for larger companies, nonprofits, and government organizations.

Can you get a business credit card without a personal guarantee?

It's possible to get a small business credit card without a personal guarantee, but it's not easy and it takes time and patience. It helps if you keep your personal credit record pristine, while building your business credit scores. FICO, Equifax, and Experian all have their own business credit scores, but the Dun and Bradstreet score known as Paydex is one of the most widely used. To get a Paydex number, you have to file for a DUNS number through the D&B website, and the bureau must have payment records from at least four vendors.

You build your business scores over time, by using small business credit cards responsibly, keeping your credit utilization ratio low, and paying on time every month. But not all small business credit cards report activity to the credit bureaus. Some only report negative activity such as delinquencies, and others don't report at all. Check with any credit card you're considering applying for to see if and how they report to the credit bureaus.

If you get a small-business loan, line of credit, or trade line from a vendor who reports to the business credit bureaus, that also helps build your business credit. Loans backed by the Small Business Administration are guaranteed by the SBA and are therefore very attractive, but they're also hard to get.

Once you have built a solid business credit score, you can ask your credit card issuer if they will remove the guarantor from the account. The bank will conduct a review of the account, and may check both your personal and business credit reports. The bank wants to see that losing the personal guarantee won't increase the risk of nonpayment. If they agree, great, you're on your way to a guarantee-free account. But some banks never remove guarantors as a matter of policy. (See also: 5 Ways to Build Business Credit When You're Self-Employed)

Another way to get credit without a personal guarantee is to grow the business to the point where it meets the revenue and size requirements of some creditors. For example, one major retailer offers a business card that doesn't require a personal guarantee for businesses with at least $5 million in revenue. Others may also require collateral such as business equipment.

Getting business credit without a personal guarantee is not a quick process. Count on needing a personal guarantee for the first three to five years of your business. In the meantime, focus on growing your company, building your business credit score, and making all payments on time.