Though many credit card providers require a form of collateral for certain small business cards, not all do. Here's what you need to know about getting an unsecured business credit card.
When a business owner applies for a business credit card, the issuer usually requires a legally binding personal guarantee from the business owner. This guarantee states that the business owner will personally pay off the balance if their company itself can no longer meet the payments, which puts their personal finances and assets in jeopardy of seizure if things go sideways.
Though many credit card companies require this assurance, there are a select few that don't. If you're looking for a small business credit card that doesn't require a personal guarantee, you should keep some things in mind as you begin the application process.
What is a personal guarantee?
In the world of lending, especially when it comes to obtaining a small business loan, the concept of a personal guarantee is also known as offering "collateral" against the debt an applicant is seeking. When applying for a business credit card, new or small businesses with little to no established credit usually have to offer a personal guarantee, in which an owner, executive, principal or partner in the company promises that they will assume personal liability for the debt if the company itself can no longer cover its payment obligations.
Such an agreement lessens the risk the lender assumes by issuing the credit, since a personal guarantee is a legally binding claim to the signatory's personal assets. While some business structures, like a limited liability company (LLC), are designed to reduce the personal risk of starting a small business, a personal guarantee supersedes any such protections.
When filling out an application that requires a personal guarantee, the executive making the agreement will provide their Social Security number, allowing the issuer to run a credit check and assess their creditworthiness. The executive can offer up their personal assets to sweeten the deal, such as bank accounts, real estate, stocks and vehicles. The bank can then claim each of those assets if the business defaults on its credit card debt. By assuming great personal risk, the business owner is effectively telling the credit card issuer that they are personally invested in the small business's success.
Can you get a business card without a guarantee?
The short answer to this question is yes. As with most small business financial questions, the precise answer is more nuanced. The number of credit cards that don't require a personal guarantee, known as "unsecured" business credit cards, is significantly lower than the number of credit cards that do. That's largely because credit card providers are reluctant to take on any unnecessary risks.
"Unsecured credit cards are more difficult to get than cards with a personal guarantee because the bank has no recourse if you go out of business," said LJ Suzuki, CEO of CFOshare. "Business debt is much riskier than personal debt, so lenders prefer to have a personal guarantee."
Though an unsecured small business card is harder to find than the alternative, there are ways to increase your chances of getting one.
First, consider your business and personal credit. Your ability to get a favorable credit card agreement depends on your company's reliability. Many lenders measure reliability by how long a business has been in operation and how large it has grown. For this reason, said Brock Blake, CEO and co-founder of Lendio, an unsecured credit card for a new or particularly small business is "very uncommon."
"[Unsecured credit cards] are generally reserved for large businesses," he said. "In most cases, and especially if your business is brand-new, qualifying for a business credit card is based on your personal credit history."
Next, check with your business's banking partner. If your small business already has an established relationship with a bank or credit union, you should always start your credit card search there. If your small business has a good enough history with that financial institution, the bank may be willing to waive the personal guarantee requirement for your business credit card based on trust alone.
Though your personal finances are unlikely to factor into the application process of an unsecured business credit card, they'll play a part if you apply for one from a bank with which you already have an account, Suzuki warns. "If you apply for a Visa card through Chase and you also have a personal bank account with Chase, they will connect the dots and consider your history with them when evaluating risk."
Advantages of a business credit card with no personal guarantee
Since it'll be harder to find and come with a few caveats, it may seem like too much hassle to apply for and obtain an unsecured business credit card. While that's worth mulling over, you should also consider the benefits of such a credit card agreement.
1. It creates a barrier between your personal and business funds.
As a small business owner, you should keep your personal and professional finances separate. This makes it easier to keep track of both balances, to calculate your taxes, and to analyze how much you're spending as a business and where you're using the credit card.
The biggest reason to aim for this type of card and the division of assets it supports, however, is that it helps protect your personal assets from being seized if your business goes belly up.
"The main benefit of an unsecured business credit card is you can walk away from the debt if the company goes bankrupt," Suzuki said. "Banks are often OK with this because businesses spend a lot more money than individuals, meaning they stand to earn higher processing fees from your purchases."
2. Credit cards can help when money is tight.
No small business experiences smooth financial waters throughout its existence. Times are likely to get tough at some points. In those times, you can use your unsecured business credit card as an extra funding source, covering essential purchases while you wait for revenues to bounce back, without the added stressor of your personal liability.
3. You can earn credit card rewards.
Like nearly every credit card these days, an unsecured business credit card is likely to offer a reward system to incentivize the card's use. Banks usually offer cashback rewards, discount pricing on select items, or miles points that you can use to pay for airfare. By taking advantage of these reward programs, your small business can save money on expenses like employee incentives or business travel.
Drawbacks of a business credit card with no personal guarantee
Though there are some noticeable benefits to an unsecured business credit card, it has some negatives as well. Before you apply for such a card, be sure to consider both sides of the coin.
1. Interest rates are higher.
Since your unsecured credit card has no personal guarantee, the bank will be more hawkish about the interest. Most of the time, these cards come with higher APRs than secured cards have, and many issuers reserve the right to change your rate at a moment's notice. This won't matter if you pay the card off in full each month, but if you carry a balance, it will cost you more than you would pay with a secured card.
"If you have less-than-stellar credit, an unsecured option could be your best bet," Blake said. "However, a secured credit card might be best to use for your business's smaller purchases. While these cards have a low credit limit, they're ideal for those who are just getting their businesses off the ground."
2. There may be additional fees.
Depending on your agreement, the bank may seek to make the unsecured credit card more beneficial to itself by adding fees. Most unsecured credit cards have an annual fee and, depending on your specific agreement, possible late fees, balance-transfer fees, and cash-advance fees.
Examples of business credit cards that don't require a personal guarantee
With countless credit cards on the market, it's difficult to find every possible option that doesn't require a personal guarantee. When trying to find out whether a business credit card requires a guarantee, search for words like "guarantee," "collateral" and "liability" in the initial agreement documents.
As with any type of credit card, you should see if the bank or credit union your business already has a relationship with offers an unsecured credit card option or would be willing to waive the personal guarantee requirement. Keep an eye out for details like the rewards it offers, the range of the interest rate that you could be charged, and any additional fees.
Here are some unsecured credit card options to start your search: