Financing A Business With A Credit Card: Risks And Rewards
Offering a path of least resistance for new ventures or troubled businesses, financing a business with a credit card may seem attractive. However, significant risks are involved, such as personal liability and potential consequences of business failure. In this article, we explore:
- The pros and cons of utilizing credit cards for business financing.
- Why keeping clear financial records is crucial.
- A couple of real-life examples illustrating the difference having an attorney can have for you when navigating these types of cases.
What Are The Advantages And Disadvantages Of Financing A Business With A Credit Card?
Exploring the advantages and disadvantages of financing a business with a credit card can be an interesting exercise. Many have delved into those books touting the potential of purchasing real estate or even entire businesses using this method. Securing bank financing can be challenging for new ventures, so credit cards can be a convenient, albeit unconventional, option to utilize when getting the operation started. Troubled businesses can find solace in the versatility of credit cards as well.
Why Is It Particularly Important To Keep Clear Financial Records Of Credit Cards Used To Finance A Business?
Financing a business with a credit card can have significant consequences, particularly in the event of a business failure and subsequent bankruptcy filing especially as it relates to the principal of the business who has, likely, either guaranteed a significant amount of the business’ debt or used the business’ credit card on which the principal is usually personally liable. If this happens and you file for Chapter 7 bankruptcy, there would be significant differences in how your case would unfold. As an individual consumer with a Chapter 7 bankruptcy case, you have to deal with not only the debtor’s income but the debtor’s spouse’s income as well, who may not necessarily have been filing. Filing as a Chapter 7 that can be characterized as a “business” case does not require dealing with these issues.
To illustrate, let us examine two clients we can serve as perfect examples of the difference. The first was a young woman who opened a clothing shop using her American Express card as her primary source of funding. From the beginning her business struggled and eventually failed. When she filed for bankruptcy, the entire debt, about $75,000 owed to American Express, was categorized as business debt. Her husband was a high wage earner, but classifying the case as a business case, we did not have to include her husband’s income in the equation. She, because of her business’ failure, was currently unemployed.
When we filed her case, the Office of the United States Trustee immediately launched an inquiry into it. They questioned whether it should be a business case or should be better characterized as a consumer bankruptcy. They wanted to see all her credit card statements, among other things. What was ultimately determined was rather interesting.
She was on the title of her house, but because she essentially had no financial background, the only one who was on the promissory note that was secured by the mortgage was her husband. As a result, when the Office of the United States Trustee analyzed her consumer debt, it found she only had about $4,000 of regular consumer debt. All her other debt was associated with the business and that debt was in excess of $200,000. Moreover, since the $500,000 mortgage on her house was not in her name, she did not have to factor it into the calculation of whether she could file as a consumer or as a business. Her case was allowed to proceed as a business case and she has received her Chapter 7 discharge and is getting on with her life.
The second was in the office finishing and repairs business, which suffered significantly due to the impact of the COVID-19 pandemic. Struggling to secure projects, the client obtained an SBA loan to sustain the business, but it did not help him survive the COVID pandemic’s three long and brutal years. His business failed and, as a result, he needed to file for bankruptcy.
When we filed his bankruptcy, we did so as a business case because his business failed. If not for his business failure, he would not have filed for bankruptcy whatsoever.
Unlike our first example, we did not include any information regarding this client’s greater household income, that of his wife, at all. The Office of the United States Trustee objected because after balancing his business debt against his consumer debt (N.B. he was listed on a $350,000 mortgage) they determined his consumer debt was much greater than his business debt. This caused his case to be considered a consumer one even though if not for Covid and his business failure, he never would have set foot inside the Bankruptcy Court. Consequently, when it was necessary to factor in not only his current income but that of his spouse, he was forced into Chapter 13, which is a wage-earn plan.
Given his situation, he could not make payments on it. He will eventually be discharged now that he is back in Chapter 7, but doing so required we factor in the greater household income instead of solely his income. These considerable differences in outcomes underscore the implications categorizing a bankruptcy case as a business or consumer case can have.
Regarding corporate credit cards, many people view them as a good thing, often almost bragging about having received one. However, what often goes unnoticed is that corporate credit cards bear not only the name of the corporation but also the name of the employee. If the company experiences financial distress and cannot or is unable to pay if credit card debt, the employee is responsible for paying off charges incurred on the card.
This situation often devolves into lawsuits when credit card companies pursue payment. Many individuals who have faced business failures find themselves unable to pay off their debts, and using personal credit cards can particularly expose individuals to potential liability. Instead of struggling to repay credit card debts, depending on specific circumstances, it may make more sense to file for bankruptcy. By declaring bankruptcy, individuals can legally walk away from their financial obligations and start afresh.
Financing a business with credit cards presents risks, especially if the business fails and bankruptcy becomes necessary. Understanding the nuances between personal and business bankruptcy cases, as well as the potential liabilities associated with credit card usage, is essential if you are considering this financing option.