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Published By Janet Gershen-Siegel at November 20th, 2017
It’s all about reputation and risk. This is the main reason why acquiring credit is not easy. Because your creditors are going to want personal guarantees. But can you honestly blame them?
So you know what I’m talking about. You shopped around the big financial institutions, and then the medium-sized banks and the small ones. You tried the banks where you do business and any others recommended by your friends or business associates. But after your long search, you were unable to obtain any sort of a company credit card without a personal guarantee.
There are over 500 distinct business credit cards out there but fewer than fifty of them grant credit to businesses without having a personal guarantee. Complicating matters, these cards are not advertised or offered to all interested consumers.
The financial institutions’ point of view is that they don’t like risk so they try to minimize it by securing a business credit card. They do so by asking you, the small business owner, to guarantee payments from your private finances, in the event of business default.
If worst comes to worst, and as a guarantor or co-signer you are unable to pay the debt, then your private assets will be executed. As in, your accounts, your vehicle, your house, your stocks, and anything else you may have used to guarantee that card. And you don’t want that.
But your position, obviously, is that you need to have this card to run your small business more effectively.
The first thing you can do, and it’s easier said than done, is to have patience. So establish creditworthiness for your small business in the same manner that you have grown your personal credit history.
For most businesses, this means paying your financial obligations punctually, plus remaining in business awhile, to build up a record of creditworthiness. Time in business certainly helps.
This is in essence the length of time your firm has been working with business credit. Certainly newer companies will have very short credit histories. While there is not so much you can particularly do about that, do not stress.
Credit reporting bureaus will also evaluate your personal credit score and your record of payments. If your consumer credit is good, and especially if you have a reasonably lengthy credit history, then your consumer credit can come to the rescue of your company.
Of course the opposite is also true. If your consumer credit history is poor, then it will have an effect on your business credit scores until your business and personal credit can be separated.
In order to get rid of the sticking point of personal guarantees, you will have to show the bank that your small business is solid. And show that it can generate steady revenue, it has a healthy cash flow, and the company has an unsullied payment history. If all of these can be shown, it will be a lot less complicated to find a company credit card without a personal guarantee.
Here are measures you can take:
Distinguish yourself from your business. This means you can really help your cause by incorporating or becoming a limited liability company (LLC). This is an independent entity from the owner(s) and it means you must register for a separate identification number with Internal Revenue Service. If your business is already an LLC you can bypass this step altogether.
If you operate a small business as a sole proprietor at least file for DBA (‘doing business as’) status. If you do not, then your personal name is the same as the company name. Hence, you can end up being personally accountable for all business financial obligations.
Which is pretty close to giving up personal guarantees.
Plus, according to the Internal Revenue Service, using this structure there is a 1 in 7 possibility of an IRS audit. There is a 1 in 50 chance for incorporated businesses! Steer clear of confusion and drastically decrease the chances of an IRS audit at the same time.
But do not look at any DBA filing as being more than a steppingstone to incorporating.
Get one or more small business credit cards with personal guarantees. The ones with high spending limits will be better. For they are the only ones reported to the business credit agencies. Make sure when you get these products, they have the personal guarantee removal feature baked right in. Keep your credit utilization at one third of your credit ceiling or less. Pay punctually every time.
Be sure to use these company credit cards to make your small business’s more sizable orders. These purchases, in combination with a low revolving debt and of course on time repayment will demonstrate to the financial institution many things.
Most noteworthy, it will show that your small business can maintain its financial resources well. It will also persuasively demonstrate that the profit your business brings in is enough. You can take care of financial obligations and more.
See to it that your personal credit history stays spotless. Eventually (in about six months to one year), you can submit a personal guarantee removal request for these preexisting business credit cards. The financial institution will perform an account review. But they may also check out your private credit report.
If the bank accepts your request then you have reached your objective. If the bank says no, don’t give up. Just move onto the next step.
You can elect to apply for third-party guaranteed lending. For example, this may be an SBA loan, for funding. Paying back such a loan will help you grow your business credit score. You can also make an application for a business credit card from a particular store. These store credit cards generally do not call for a personal guarantee.
Go for a store where your business makes purchases frequently. And by all means don’t forget about those on time payments! These store credit cards, along with an SBA loan will enhance your PAYDEX score provided by Dun and Bradstreet.
If you are unfamiliar with the terminology, the brief version is that PAYDEX is for businesses what FICO is for individuals. Store credit cards will supply you from the start an added bonus. They will diminish your individual accountability for your company debt.
Ask the bank again to take off the personal guarantee clause. Or make an application for new small business credit cards without a personal guarantee, once you have attained an 80 PAYDEX score under these conditions. Your chance to get such credit cards will increase tremendously.
You can as an alternative apply directly for those very few business credit cards with no personal guarantees. For example you can select Sam’s Club® Business MasterCard® or the Bremer Bank Visa® Signature Business Company Card.
Each particular card of this type asks you, the small business owner, to achieve a set of conditions. But these will differ from one product to another.
For a Sam’s Club ® Business MasterCard ® you need your business to bring in over $5 million in annual sales.
The Bremer Bank Visa ® Signature Business Company Card is attainable for businesses. But you must have a yearly profit between $1 million and $10 million.
And other business credit cards without a personal guarantee attached demand an open Dun & Bradstreet file. Plus there are other stipulations to be met. Make sure to consult the credit card provider and read all of the aspects of the promotion with care.
You can also get better business credit cards without personal guarantees as you build business credit. Business credit is yet another way to prove to lenders and vendors that your company is for real.
Business credit is credit in a business’s name. It doesn’t tie to a business owner’s individual credit, not even if the owner is a sole proprietor and the solitary employee of the business. Hence, a business owner’s business and individual credit scores can be very different.
For the reason that business credit is detached from individual, it helps to protect a business owner’s personal assets, in case of court action or business bankruptcy. Also, with two distinct credit scores, a business owner can get two separate cards from the same vendor. This effectively doubles buying power.
Another advantage is that even startup ventures can do this. Visiting a bank for a business loan can be a formula for frustration. But building small business credit, when done the right way, is a plan for success.
Consumer credit scores are dependent on payments but also other factors like credit use percentages. But for small business credit, the scores actually just depend on whether a company pays its bills promptly.
With patience and in time, you can get a business credit card from a financial institution without any personal guarantees. All you need to have is what the financial institutions ask. And that is a dependable business bringing in consistent earnings, with a healthy cash flow.
If you are as passionate about this as we are, please help us spread the word about getting business credit with no personal guarantees.