Friday, December 05, 2008

Credit Cards : Small Business = Personal Guarantee

Since I own a few small businesses, I receive a boat load of small business credit card applications. The mailers always say the same thing in GIANT BOLD PRINT: get your "BUSINESS CREDIT CARD".

Yeah, sure... "business" credit card, so long as you sign with a personal guarantee.

As I sit here watching the unraveling of the American debt-laden financial system in this current economic crisis, I can not help getting a bit upset about the sick irony that these bank credit card offers present. That is, if you are a large company, a public company, and/or have reached some magical "size" threshold where, as an incorporated entity alone, credit is issued and secured ONLY by the assets of the company (as opposed to requiring any sort of personal guarantee by corporate officers and the like).

So, as all these massive corporations default on their debt, file for bankruptcy, and so in... I can not help but find these "business credit card offers" (that require my personal guarantee of payment) all ironic, sickening, and disturbing. A small business entity with small amounts of credit must secure their credit personally, but yet a "large enough" business can borrow hoards of cash and default on payment (repeatedly in many cases -- where companies have been given many a chance, gone bankrupt repeatedly, etc - like airlines e.g.) and still not be required to offer any personal guarantees from corporate officers.

I really believe this is, in large part, why corporate management in this country is so terrible. There is little vested stake in the DOWN-SIDE of the business should anything go wrong. Contrast that to the fact that if I take out "business credit" in the name of one of my small businesses, that I am really taking out money that I PERSONALLY guarantee to repay. Who do you think has more incentive to PAY BACK THE LOANS?

So, while the biggest of the big companies can borrow with nearly no limit (especially in the day of government-backstopped borrowing), and repeatedly default - sticking banks and investors with huge losses and write-downs - the small borrower does not have such a luxury of non-repayment. Instead, we have to personally guarantee every last dollar borrowed with these "business credit cards" and "business loans" that are nothing more than personal credit cards and personal loans that happen to also include someone typing the name of our business on the application in addition to our personal information.

I am not saying that there should not be personal guarantees for credit on small business loans, especially if the small business has not been around for a long time or shown significant credit worthiness. Instead, I am saying that there needs to be more "risk" for large business borrowing - risk to these insanely over-compensated executive managers that can take millions or billions in compensation and stock options during the good times (heck, even during the bad!), but yet not be on the hook for a dime in personal losses when the company defaults on loans a mere year or two later... when, obviously some of that insane compensation should have went to paying down debt or avoiding debt in the first place.

There are rampant cases of this personal-profit, company-loss scenario among large companies, but yet they continue to obtain credit without personal guarantees. And, here I am getting my nearly daily mail about how to get my "business credit card" which I have to guarantee personally. So, a note to all you banks that send me these offers for "business credit": get lost!

I will take such an offer (perhaps) when the playing field is level and those "large companies" that continually stick banks with Billions of dollars in losses will have their own management personally guarantee some of those loans. I guarantee I am a better credit risk than GM, Ford, or Chyrsler, and I still do not see banks (or the US government) demanding PERSONAL GUARANTEES from those corporate executives!

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