Given the tumultuous economic conditions affecting small businesses right now, your small business may have had to take on unexpected costs or has experienced dips in revenue. To help cover your small business’s expenses and to ensure the survival of your business, you may have had to take on credit card debt on your company’s credit card.
While credit card debt can be a good tool to help solve short-term funding issues where another type of short-term business loan would be too much of a hassle, the use of it can also create long-term problems for business owners with its high-interest rate debt. This can siphon your cash flow, which can be critically necessary for businesses, especially in rough financial positions. Your credit card payments from interest can exceed what might be financially healthy for your small business.
The frequent use of debt on your business credit card can also lead to another key problem for small business owners. When your credit card balance gets too high for your company’s cash flow to manage, your business may not be able to afford your credit card bill. If you are close to this situation, or in this situation with your small business yourself, you may be interested in the consequences of what happens when you cannot pay back a business credit card.
As a small business owner, you have come to the right place. In this post, we will review everything that you need to know about the basics of your business credit card, the liability that you are exposed to when you accumulate debt with it, the initial and final steps you can take to prevent consequences of company credit card debt which is too high, and the penalties that you might have to pay for defaulting on your credit card.
There is no need to worry yet. There are still several options available to your small business for succeeding in getting out of the worst business credit card debt situation. We will cover the following topics in detail:
What is a Business Credit Card?
A business credit card is a type of credit card similar to the one that you might use for personal purchases. The key difference between a consumer credit card and a business credit card is that your consumer or personal credit card is explicitly attached to you, your credit score, and your income, as far as the lender is concerned. Your business credit card, on the other hand, is attached to your business, but it also uses key factors from your personal credit history and other forms of credit reports to attach liability to you and understand the likelihood that a company can pay its debt back.
Your business credit card is only for purchases related to the operation of your small business. You need to be sure that its use will only correspond with necessary company purchases.
Your business credit card will be granted following a successful application for a business credit card. Your personal credit history, personal credit reports, business credit history, business credit reports, bank accounts, revenue, personal assets, and more may be considered. This is especially important for small business credit cards because of the high risk of failure to the lender when it comes to small businesses. Although small business owners work very hard to ensure that their small business is successful, credit card companies due take on a decent level of risk in giving a credit card to different companies. There is a lot to know about business credit cards, and you should familiarize your small business with your business credit card options.
Understanding Liability with a Business Credit Card
Perhaps the most important reason that you need to be sure of what happens if you are unable to pay back your small business’s credit card is the liability aspects of what your small business might be exposed to.
For many small business owners, there is a substantial worry about defaulting on their business credit card debt as they may not have enough revenue, cash flow, or bottom-line flexibility to be able to support paying back their business credit card debt. As they wonder about the consequences that they may face with their business credit card debt, they may think this depends on the legal structure of the company.
Personal liability for small business credit card debts is something that must be taken very seriously as a small business owner, as small businesses are often not protected in the way they think they are from the debts of their business. For instance, a sole proprietor structure is very common for small businesses, and with this structure, personal assets are not protected in the event of a legal dispute, such as a lawsuit. However, even with other structures that typically provide protections, like LLCs, you may not be in the clear. A lot of larger revenue and established small businesses are LLCs, or limited liability companies, which can lead their operators and owners to take on additional risk thinking they won’t be personally liable.
Unfortunately, this is likely NOT the case. While the structure does determine degrees of liability with credit card debt in certain instances, it is more likely that you are personally liable for the business credit card debt that your company has taken on.
This is due to something called the personal guarantee that most business credit card issuers will have in the credit card agreement that you sign when getting a business credit card. The personal guarantee means that, in the event of your small business failing, you will be obligated to pay to make a repayment on the debt that you owe.
A personal guarantee makes sense for lenders since many small businesses fail. When they fail, lenders want to be sure that they can still retrieve the capital that they have loaned for that small business to spend on its business expenses.
Some credit cards come without a personal guarantee, which is known as corporate credit cards. However, these kinds of cards are not typically issued to small businesses and startups. They are given based on the creditworthiness of a given business, their revenue and cash history, and their credit history and reports. These card accounts are safer for credit card companies. These types of cards are also issued for practical reasons, such as when a company simply has too many people and too many expenses to assign to one person under a personal guarantee.
Since this type of credit card option is not available to your average entrepreneur, there is likely a personal guarantee attached to your business credit card. You can check your credit card agreement for the exact information pertaining to your situation.
Initial Steps to Pay Back your Business Credit Card
If you anticipate your small business running into a problem of having too much credit card debt or simply cannot repay the amount of credit card debt that you have taken on with your current operations, there are some things that your business can do while there is still time left. Avoiding the consequences of not paying back your business credit card is likely a wise idea the soonest as you can do so. Looking into your business finances and seeing about a way out may be the best strategy for your small business.
This is because incurring some of the consequences of not paying back your business credit card can have personal and business impacts on the operation of your small business. Moreover, these costs will only get greater over time. Finding the right solution to manage your debt is important, and thinking about ways to improve your company’s financial situation will likely pay off in the long run. Higher credit card debt will only increase the expenses that your small business will have to pay, as well as hurt your credit score and reputation for future equity or debt raises.
One of the best ways to create additional cash flow from which you can pay down your credit card debt is to improve your small business’s budgeting, especially by cutting unnecessary expenses. If you have not taken a look at your company’s expenses in a while, this is likely all the more a great idea. You will likely be able to find some areas where you can cut back your small business’s expenditures.
Overhead is a common area where small businesses sometimes find the ability to reduce the amount of money that they are spending on wages and unsuccessful promotions. You may consider cutting bonuses or hours to free up capital to be spent on paying back your small business credit card debt. Alternatively, you may think about analyzing the effectiveness of your latest marketing or advertising campaigns and cutting back to where campaigns have been more successful. The point is that by reducing expenses that your small business does not need to be making, you can make your company’s budget much more capable of making your credit card debt payments.
Another area that your small business can look to is the revenue that your business is generating. You may think about whether you can better optimize your prices, such as by increasing them, to bring in more revenue. This additional cash flow could be used to help pay down your business’s credit card debt. At the same time, this decision might make a lot of sense in the context of increasing inflation affecting prices all around the country.
You may have looked into a lot of common options for your small business to repay its credit card debt. One of these, which you should not neglect, is the availability of savings or cash that your business has in its bank accounts to be able to repay the credit card debt that you owe.
A similar angle of this may be to look to your personal bank accounts and personal savings to have a sort of personal finance option for your small business. If your small business is really in trouble in the short term and you need to be able to have a capital infusion, you could loan your business money. You can replace your business’s credit card debt with a loan that pays interest to you at a lower interest rate than what the credit card company has on your own debt.
If you do not have enough personal capital to be able to cover the full amount of debt that your small business has taken on, you could consider seeking similar financing options that allow you to transfer your debt and pay a lower overall interest rate.
What Happens if You Can’t Pay Back Your Business Credit Card
Aside from taking some positive first steps to improving the management of your small business credit card debt, you may be interested in the consequences of not paying back your business credit card.
The common and largest consequence that many worry about is the potential that you can be sued as a small business owner responsible for your small business debt. Because of the personal guarantee on most business credit cards, it is likely that you will be responsible for your small business debt. This means that you need to be prepared to pay your business credit card, even if it comes from your personal assets.
With this knowledge in hand, you can hopefully take the right steps to avoid this from happening. A lawsuit is a real threat in the event that you cannot make a repayment on your debt. However, a lawsuit is likely not the first thing that you need to worry about in the realm of immediate consequences for being unable to pay back your business credit card.
One of the much more likely immediate consequences of not paying back your business credit card debt is being assessed late payment fees or late fees. A late payment fee is a type of common credit card fee for both personal and business credit cards. Business credit cards usually have two different kinds of late payment fees. These are fixed payments for not being able to make the minimum amount as a payment by the date on which it is due and a percentage charge on the amount which is overdue by the due date. The exact figures for your small business will likely depend on just how much your small business owes and the terms and conditions outlined in your credit card agreement. You should check there for additional details.
The late payment fee is likely automatic for your business credit card. So, if you have debt that you do not make the minimum payment on, you should be prepared to have this fee assessed to your card account.
The other type of likely immediate consequence of missing paying the minimum amount which is due by the due date is having your business credit card account subject to a penalty APR. A penalty rate is another type of fee that is used by credit card companies for both personal and corporate credit cards. When you do not make a payment on the minimum amount that is due, a credit card company will usually raise your interest rate, known as your APR, on your credit card.
This interest rate makes borrowing more expensive for your company. It also helps compensate the credit card provider for the added risk that they take on by issuing you a credit card when your small business is unable to make all of the payments on your debt that you are required to.
Penalty APRs usually last for a period of time up to a year. The specific terms of what amount of interest rate amount increase will occur depending on your situation as outlined in the credit card agreement.
Overall, the most immediate and long-term threat to the financial health, stability, performance, and future growth of your small business is the effects of late or unpaid credit card debt on your credit score. When your small business misses a payment, your personal and business credit scores can be affected. This is because the vast majority of credit card companies will report missed payments to credit bureaus, like Equifax and Experian, measuring your credit score for yourself and your business. Late payments or no payments can have a drastically negative effect on your credit score.
Not only will late payments or unpaid business credit card debt make it worse for your business to get funding in the future and increase the interest rates that you can finance at, but you will also likely have your personal credit score affected. This means that your good credit score might disappear, making your mortgages, car loans, or other types of loans or lines of credit much more expensive in the future.
As you can see, you should really try to avoid late or missed business credit card payments as well as unpaid credit card debt.
Final Steps to Take If You Can’t Pay Back Your Business Credit Card
If you know that your small business will be unable to pay the minimum payments that you are required to make, and the initial steps mentioned in this post will not work, it may be time for you to consider some final steps to salvage the financial health and credit score of your business as well as protect your personal assets.
One of the tools that may be able to help you as a small business owner, especially before you miss your first credit card payments, is transferring your credit card balance to a business credit card known as a balance transfer business card. These types of cards typically have a period in which the APR on the card is 0%. This means that there is a period of time on a credit card where the balance does not need to have interest paid on it. This can provide your small business with a great lifeline. However, it is important to continue making payments and come up with a better credit card debt management strategy.
If your small business is still having problems finding a balance transfer credit card, you may need to reach out to your credit card provider. You should notify them of your situation, of what you can pay, and inquire about the options they may be able to make available for you. While this option essentially welcomes some of the consequences to your credit scores and potential fees to your business, you may be able to receive some favorable terms for your situation compared to what would have otherwise been offered.
As you can see, the consequences of being unable to pay back a business credit card seem to follow a rather organized timeline. When certain payments are not made, a lender will move to certain consequences. These eventually lead to the worst credit card debt responses, which can include lawsuits or collection. In any case, it is important that you see the opportunities for taking action at every step in the process of being unable to pay back a business credit card.
Taking a proactive role in managing your business credit card debt as a small business owner is a wise and mature business decision that will help carry your small business to success by improving the way that you are handling your small business’s debt situation. Biz2Credit articles give great insights into developing a better debt management strategy for your small business.
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