Dubai: For entrepreneurs, a business credit card often helps with working capital needs, while also helping them keep records and build business credit. However, how do these cards impact card holders?
When applying for a business credit card, you may be surprised to learn that almost all business credit cards require a 'personal guarantee' that all charges will be paid, meaning business credit card holders are personally liable for repayment of their charges.
What does it mean for you to have a ‘personal guarantee’?
“You will almost always be personally liable for the charges on your business credit card,” said Abu Dhabi-based independent credit consultant Rajesh Markara.
"Such personal guarantees mean that you will always have the charges on your business credit card account paid. You can't claim that you aren't responsible for paying the charges."
Wording in the card's terms and conditions will state that both the business and whoever signed for the account are liable for all transactions made with all cards, including those of authorised users. It also adds that if you leave your firm, you will stay responsible for outstanding balances on the account.
“You can't say that the debt is part of ‘the company’ after you leave your company. In short, you are just as responsible for all of the charges to your business credit card account as you would be if they were made by you on your personal credit card,” he added.
Limited liability usually means you'll only be responsible for a set amount of a defaulted account. Unlimited liability indicates you may be responsible for the full account balance, plus any additional fees.
Can you get a business credit card without a personal guarantee?
There are types of business cards that doesn't require a personal guarantee, but that's a corporate card designed for larger companies and government organisations.
Cards with no personal guarantee aren't linked to your personal liability with accounts and assets. Instead, your card is linked to your business, and only your business account and assets are used to pay it.
“It's possible to get a business credit card without a personal guarantee, but it's not easy. It helps if you keep your personal credit record pristine, while building your business credit scores,” added Markara.
How does a business credit card help build your credit score?
Rupesh Naish, a credit and debt consultant based in Dubai, explained that some credit bureaus 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.
“Once you have a business credit card, the way you use it could affect your personal credit score. If your credit card issuer reports business card activity to the consumer credit bureaus, your balances and payment history could become part of your personal credit history,” added Naish.
"The degree of its impact on your credit score depends largely on what type of card it is and how you use it. The largest factors are whether you are the primary account holder, an authorised user on a business card or an employee in a large company with one of its corporate cards."
However, generally, when you've been issued a corporate card, you can expect very little effect on your credit. Your credit may be checked when the card is issued to you, but the balance and payment information is often reported as part of the organisation's credit history, not yours.
Once you have a business credit card, the way you use it could affect your personal credit score
Key takeaways
Business credit cards are generally meant to be used for business expenses, like purchasing supplies, office furniture or travel, so card holders should be careful about using credit cards to spend money not yet earned or in the bank.
Business credit cards work in much the same way that personal cards do. You charge purchases on your card and then, after the end of each billing cycle, you receive a statement with your total balance owed and minimum amount due.
Business credit cards can provide important benefits to your company, including rewards you can use for virtually free travel, perks like expense management, and credit to help you grow your business.
However, keep in mind that like a personal credit card, a business credit card carries an interest charge if the balance is not repaid in full each billing cycle. So while they generally offer a higher spending limit and better rewards programs, as with any credit card, there are risks involved.
