Dear Your Business Credit,
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I run a small business with a 50-50 partner. We are thinking of applying for a business credit card. I have never asked my partner about his credit score. If our application were to get rejected, would that hurt my credit score? And if we got a joint card and my partner were to misuse the card, would that affect my credit?
It's smart to ask these questions now -- before you apply.
If you and your partner seek a business credit card together and the application gets rejected, it won't have much of an effect on your credit score, according to Leslie Tayne, an attorney based in Melville, N.Y., who works with small businesses on issues related to debt and credit. "It's a minor hit," says Tayne.
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The only exception is if you apply for multiple credit cards, and credit bureaus see multiple inquiries on your credit history at around the same time. That could cause a more significant dip in your score, albeit a temporary one.
However, there are bigger risks in this situation. The real minefield is tying your credit to each other's.
You have several options in the way you sign up. You can have joint credit -- which makes both of you responsible for the debt -- or one of you can be the main applicant with the other one added as a co-signer or authorized user. A co-signer is a guarantor for the debt and may or may not have access to the credit. An authorized user is not responsible for repayment of the debt but has access to the credit.
No matter which option you choose, the bank will require at least one of you to provide a personal guarantee that the debt will be paid. "Whenever you put a card in a company name, generally someone has to personally guarantee it and is able to get other cards in other names."
If you provide a personal guarantee, the handling of the card's debt is reported to the credit bureaus and affects your personal credit history, though typically not as much as a personal card would.
It doesn't matter if your partner covers a certain portion of the bill. That's between the two of you. The credit card issuer will still pursue the signers on the account if it doesn't get paid. If you happen to be married, an unpaid bill could affect your spouse's financial situation, too. Applying for a loan as a married couple will be much harder if your credit score is in the basement because of something your business partner did.
What could go wrong? In a worst-case scenario, your partner could go on a spending binge, run up a big bill for personal expenses he can't pay, quit the business, ignore your calls and emails, and leave you with the tab. That's pretty unlikely. But even if there's no drama, you could still put your credit score at risk. Say you and your partner decide that he will write the monthly check to pay off your joint credit card balance, but he turns out to be forgetful and makes a payment very late. Depending on how tardy it is, this could affect your credit history. "When you go into business, you can't control another person," notes Tayne.
That said, it is possible for each of you to open separate credit card accounts in the name of the business, for which you are individually responsible, she says. Doing this separately will still enable you to start building up a credit history for the business.
I should note that Tayne advises would-be business owners against going into business with anyone whose credit score they don't know. We all have heard of business partnerships that have gone awry after a good beginning.
If your partner has a low credit score, it doesn't mean you should avoid doing business together. It's possible he just hasn't used credit much in the past. However, it may point the way to red flags, so it's always good to have an open discussion about any background issues going on in your lives that may affect the business -- before you form an LLC or incorporate.