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The Pros and Cons of Canceling a Business Credit Card
December 04, 2017
pros and cons of canceling a business credit card

The Pros and Cons of Canceling a Business Credit Card

Whether finances are tight, or you need to close your business for other reasons, canceling your business’s credit card is a tough decision to make. Before you take the plunge, it’s important that you’re aware of the effects it can have on both your business and personal credit scores. In this post, we cover the pros and cons of canceling your business’s credit card to make sure you’ve considered all your options.

The Pros of Canceling Your Business’s Credit Card

Closing a business credit card won’t affect your personal credit score as much as closing a personal credit card would. However, it will affect your business’s credit score. Still, there are some caveats to these impacts, which we mention in the cons section below.

Fortunately, there are some proactive steps you can take to mitigate any decreases to your personal and business’s credit scores.

  • Open another business credit card for a year or two so that your business’s credit can bounce back. You don’t have to use it often, and don’t cancel your card immediately after receiving the new card. Slow down your spending, and give it some time.
  • Pay off all outstanding balances, even if it takes you several months. It’s worth it to set things right with the bank, rather than creating a situation where the bank will want to sue your personal assets for the outstanding balance.
  • Consider forming a limited liability company (LLC). If you’re a sole proprietor or an unincorporated entity, you’ll want to consult with a lawyer about if you should pay the upfront fees to become an LLC. The LLC will help separate your personal assets from your business’s assets in the event of lawsuits.
  • It’s possible your bank won’t report on your small business card. According to the Consumer Financial Protection Bureau‘s 2012 report, banks “issuing revolving credit to consumers usually report information monthly on consumer cards. But these banks are also less likely to report on small business cards even when these are owed by, and underwritten based on, the personal credit history of the business owner.” To confirm whether this is the case with your card and bank, call and ask.

The Cons of Canceling Your Business’s Credit Card

When you applied to incorporate your business, you had to tie it to yourself through your social security number. This is how the government and banks keep individuals liable for their business practices. Therefore, it’s not difficult to imagine that any negative action you take in business will eventually impact your personal life.

  • There will always be a risk of your business’s credit score impacting your personal credit score. Check your credit reports regularly. This is important especially in the weeks after canceling your business’s credit card. This will help you figure out next steps for your business and its credit.
  • Did you sign a personal guarantee when opening your business credit card? If so, this puts your personal assets at risk. And your personal assets at a higher risk if you have an outstanding balance, no other business credit cards to fall back on, or if you’re consistently paying lower than the minimum payment. Even if you have an LLC, your personal credit score could still take a hit. If you’re unsure about having signed a personal guarantee, call your card’s customer support to confirm.
  • If you’re a corporation, you’ll have more complex rules and processes to follow when canceling your business’s credit card. But with a few good lawyers and accountants, your employee’s indiscretions in overspending can be handled swiftly and elegantly. Some padding is built-in for larger corporations and their business credit as it relates to employee’s corporate cards. However, your corporation will need to take full responsibility for your employee’s spending.
  • For small businesses, your employee’s indiscretions could greatly impact both your personal and business’s credit scores. This is called “joint and several” liability, and it is probably included in your small business’s credit card’s fine print.

The Bottom Line

After considering each factor, it’s important to take a step back. Ask yourself why you’re canceling your business’s credit card. If you know you’re going to start another business or need a loan for a house or other large expense, you should make sure you’re ending things with your current bank on a great note. As they say, what goes around comes around.

There are very few legitimate reasons to quickly cancel your business’s card. Most scenarios require some extra time and effort to ensure your personal and business’s credit scores aren’t impacted too much. The extra effort will pay off in dividends for you and your business’s future ability to take out another credit line.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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