13 Sep 23

Is Business Credit Card Debt Recourse Or Nonrecourse

| by

Last Updated on: 14th September 2023, 12:23 am

Is Business Credit Card Debt Recourse Or Nonrecourse?

When it comes to business credit card debt, one of the big questions is whether it’s considered recourse or nonrecourse debt. This is an important distinction because it affects how lenders can collect on the debt if the business defaults. Let’s break it down and see what makes business credit card debt recourse or nonrecourse.

What is Recourse Debt?

Recourse debt means that the lender has the legal right to collect payment from the borrower if they default. With recourse debt, the borrower is personally liable for repaying the debt. This means the lender can go after the borrower’s personal assets like their house, car, or bank accounts if the business assets aren’t enough to cover the defaulted debt.

Most business loans and lines of credit are considered recourse debt. The lender requires the small business owner to personally guarantee the debt, making them personally responsible for repayment. Even though the loan is for business purposes, the owner’s personal credit and finances are on the hook if the business can’t pay.

What is Nonrecourse Debt?

Nonrecourse debt, on the other hand, means the borrower has no personal liability if the business defaults. With nonrecourse debt, the lender can only collect payment from the business assets and revenue, not the owner’s personal assets. The lender cannot go after the borrower’s house, car, or other possessions.

Nonrecourse debt is less common with small business financing, but is sometimes used with equipment leasing or financing, commercial real estate loans, or SBA 504 loans. With nonrecourse debt, the business assets themselves serve as collateral, but the owner’s personal guarantee is not required.

Is Business Credit Card Debt Recourse or Nonrecourse?

In most cases, small business credit card debt is treated as recourse debt. The business owner is required to personally guarantee repayment of the credit card balances. This means if the business defaults, the credit card company can pursue collection from the owner’s personal bank accounts and assets.

Business credit cards don’t automatically make debt nonrecourse just because they’re used for business expenses. The cardholder agreement requires the small business owner to be personally responsible for paying back the balances, similar to how a personal credit card works.

Some sources of business credit card debt that may be nonrecourse include:

  • Corporate credit cards where the cardholder is not a business owner with personal liability
  • Credit cards from buy-now-pay-later lenders like Brex where the owner is not a personal guarantor
  • Business credit cards secured with a certificate of deposit instead of a personal guarantee

However, these nonrecourse options are less common for small business owners. Most standard business credit cards from major issuers like Capital One, Chase, Amex, and Citi do require a personal guarantee from the business owner.

What Happens if You Default on Business Credit Card Debt?

If your business defaults on credit card debt, here is what may happen depending on whether it’s recourse or nonrecourse:

  • Recourse debt: The credit card company can sue you personally for the unpaid balance. They can garnish your wages, put liens on your bank accounts and property, or force you into bankruptcy.
  • Nonrecourse debt: The credit card company can only collect from the business revenue and assets associated with the account. Your personal finances and property are not at risk.

For both recourse and nonrecourse debt, the credit card company will report the default to business credit bureaus, harming your business credit scores. They may also cancel your credit cards, close your accounts, and refuse to do business with you in the future.

How to Avoid Defaulting on Business Credit Card Debt

To avoid finding yourself in default, here are some tips for responsibly managing business credit card debt:

  • Pay at least the minimum payment every month on time
  • Pay more than the minimum when possible to pay down balances faster
  • Use balance transfer offers to consolidate higher-interest debt onto a 0% intro APR card
  • Only use business credit cards for necessary purchases you can pay off within the billing cycle
  • Set up autopay from your business checking account to avoid missed payments
  • Carefully monitor account activity and statements each month
  • Have an open line of communication with your credit card company if you anticipate issues repaying

It’s also wise to separate business and personal expenses by using dedicated business credit cards. This helps segment your finances and avoid commingling personal and business obligations when it comes to recourse debt.

If your business is already struggling with credit card debt, act quickly to address it. Consider working with a credit counselor to create a repayment plan or negotiate with creditors. In some cases, settling debt, bankruptcy protection, or debt restructuring may be necessary to avoid default.

Key Takeaways on Business Credit Card Debt

To wrap it up, the key points to understand about business credit card debt recourse vs. nonrecourse include:

  • Most small business credit card debt is recourse debt with personal liability for the owner.
  • Nonrecourse business credit cards are less common but do exist, especially when secured by business assets.
  • Defaulting on recourse debt exposes the cardholder’s personal finances and assets to collections and lawsuits.
  • With nonrecourse debt, only the business itself is liable in case of default.
  • Avoid business credit card default by carefully managing balances, expenses, payments and credit limits.