How to Recover From Business Credit Card Debt

Business credit cards are essential financing tools for both new and established business owners alike. When you’re just beginning, they can be your main financing lifeline and how you build your business credit. And, even when you’re eligible for a small business loan later on, they’re instrumental for everyday purchases. Without careful use, though, you could spend faster than you can pay, and need to recover from business credit card debt.

Let’s make one thing clear: You’re not alone if you need to find a lifeline for overspending. Many business owners need to know how to recover from business credit card debt. As of March 2018, business owners had $50 billion of outstanding credit card debt. And, as spending on business credit cards is projected to grow by nearly $200 billion over the next few years, debt will grow with it.

Rather than worry about the money you owe ballooning, figure out the best tactics to pay it back and start with a clean slate. We’ll go through the best approaches to recover from business credit card debt. With this guide, you should be able to figure out the most realistic approach for your company, plus how to rebuild your credit to go forward.

Who’s Responsible for Business Credit Card Debt?

One of the biggest benefits of business credit cards is that they don’t require you to have a certain amount of time in business or established revenue to qualify. That’s why they’re so ideal to finance startup costs, for instance; according to the US Small Business Administration, as of 2017, more than 10% of startups use a business credit card to get things off the ground.

The biggest consideration for card issuers is your personal credit score—if you’re responsible with your personal debt, as indicated by your credit history, you’re lower risk for a business credit card. After all, you are the one in control of your business’s finances.

With that in mind, remember when you applied for your business credit card with your personal credit score? You can likely see where this is headed.

Personal Guarantees and Business Credit Cards

Although your card is linked to your business, there’s a very high likelihood that you signed a business credit card personal guarantee. That essentially assures a lender that, in the case you can’t pay back your business credit card debts, a card issuer will be able to collect from you personally.

Credit card companies aren’t so much betting that you’ll go out of business. Rather, since they’re in the business of mitigating their risk, they need some kind of guarantee that they’ll get their money back.

Personal liability clauses—which is what a personal guarantee boils down to—are entirely standard fare. And they apply to every type of business entity, regardless of whether you’re a sole proprietorship, all the way through an S-corp.

It’s also important to know that personal guarantees supersede any legal separation that your business entity affords you. For instance, although you might be personally shielded from corporate lawsuits as an LLC or LLP, you’re personally legally implicated with personal liability clauses. You sign away the “corporate veil” with the clause.

Are You Still Personally Responsible for Debt If Your Business Goes Under?

Unfortunately, yes. A personal guarantee holds even if your business closes its doors. That’s one of the reasons why choosing the right approach to recover from business credit card debt is essential: Creditors will be on you personally, even if your business’s name is on the card.

On the chance that you have a business credit card with no personal guarantee, which is very rare, business debt liability will depend on how your business entity is organized. (Side note: If you don’t know if this is you, it’s almost certainly not. You almost always have to go out of your way, like negotiating with a bank with whom you have an existing relationship, to circumvent a personal liability clause.)

How Creditors Can—and Can’t—Collect From You

The good news (yes, there’s some good news) is that creditors can’t just show up to your door unannounced and start stripping your home down to the foundation. For unsecured debt—aka most credit cards—in order to collect, creditors will have to bring a suit and get a judgment against you.

That’s often a very involved process that costs time and money on the collections side. So, creditors might be more willing than you expect to work with you on settling balances or finding a payment plan that’s more suitable for your cash flow.

7 Options to Help Recover From Business Credit Card Debt

You can take a few different paths to recover from credit card debt. Some solutions are more extreme than others, for sure. As you read on, consider that the best option for your business might be a little from Column A and a little from Column B, so to speak. In other words, you don’t just have to pick one. No one wants to—nor should—go straight to filing bankruptcy.

1. Pay off high-interest debts first.

As you figure out your best approach to dig yourself out of credit card debt, one thing is for sure: Don’t let your balances sit. If your tendency with overdue bills is the out-of-sight, out-of-mind approach, that’s not only killing your credit rating, but it’s making your financial problem worse.

If you have bills due across multiple cards, figure out which of your debts is costing you the most (your outstanding balance and its APR). Focus on paying down that balance before the others, rather than putting a little money toward each balance here and there (or paying nothing at all, of course).

2. Talk to your credit card company to see if you have any wiggle room.

This won’t solve everything, and doesn’t work for everyone. But calling your credit card company is an oft-overlooked, easy first step for those working to recover from business credit card debt.

The federal Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 is consumer  protection legislation that was enacted in 2010. It was put in place to shield consumers from unfriendly practices like unexpected APR hikes, or billing multiple times during a pre-established personal credit payment cycle. Although these are great protections for consumer cards, they don’t apply to business credit cards. That means there’s a possibility something isn’t working for you with your current card—be it a fee, or a minimum payment setup—that’s exacerbating your card debt.

Call your credit card issuer. If there’s a way that you can more easily afford payments, they might be willing to work with you on lowering an interest rate, moving payment dates, or even settling on the amount you owe. That’s especially the case if you’ve had a good track record in the past and run into some recent cash flow issues.

The bottom line is that they’d rather get their money back than not, and also keep you as a customer—and, remember, it’s in no one’s best interest to have to seek a judgment against you to collect on your debts. Depending on the sum of your outstanding debts and the history you have with payments, you might be able to make more progress here than you expect.

3. Cut operating costs to save money.

This might seem intuitive: If you owe money, you have to find the cash to pay off your balance. But in the panic of debt, many business owners don’t actually stop for a moment to audit their own operations. Why are you spending money, exactly? What are you spending it on?

Work with whomever you trust to evaluate your business intimately and objectively, whether that’s your accountant, or even an independent consultant. Or, if you need a place to start on your own, begin examining your variable costs. You might not be able to reduce your overhead, for example, but you can go right to addressing the non-fixed expenses, and subsequently free up cash to devote straight to paying down your credit card debt.

4. Consolidate your credit card debt with a small business loan.

You might have the opportunity to obtain a business debt consolidation loan to help you recover from your business credit card debt. In this case, you’d essentially work with a small business lender to obtain a loan to pay off your credit card debt.

Casey McNamara, a senior loan specialist at Fundera, says that medium-term loans and SBA loans are a strong fit for this purpose, due to their longer payment cycles and lower monthly payments which are more like credit card payments. McNamara adds:

“They’re preferable because the borrower receives a lump sum that they don’t otherwise have—or else they’d just pay it off directly themselves. That allows them to pay off the entire balance to avoid continually accruing more interest each month. With a consolidation loan, they can cap the interest charges over the term of the loan which is set and finite, as opposed to credit cards that you can roll over month over month in perpetuity.”

One drawback of this approach? You’ll need a good credit score to qualify for one of these debt consolidation loans.

5. Refinance your business credit card debt.

If you’re looking to recover from business credit debt spread across multiple cards, you can look into refinancing. Multiple monthly payments can be difficult to manage—and then, if you begin to miss one, it can set into motion a cascading effect of overdue payments. Your debt begins to pile up across all cards, including your interest.

In that case, look into whether you’re eligible to refinance your business credit card debt with a balance transfer onto a credit card with a lower APR than what you’re paying now. Preferably, try to qualify for a 0% introductory APR business credit card. Many of these cards not only have no-fee balance transfers, but also offer extended periods (sometimes upward of a year) to pay off your debt free of more interest.

Paola Garcia, a small business advisor at Excelsior Growth Fund, a New York State nonprofit lender, says this is a good approach if you’re not eligible or ready for a business loan:

“If you know that you will be taking more than a year to pay off this debt, as a last resource, obtain a new credit card with a 0% interest rate for the first 12 to 18 months and try to pay off as much principal as possible that first year. This way your balance will be much lower once the 0% interest period is over.”

6. Settle your credit card debt.

If you’re familiar with the process of negotiating balances on outstanding personal debts, then you already know a bit about settling business debts, because it’s similar. It’s possible to work with your creditors to settle your credit card debt.

You might be able to negotiate with business credit card companies or banks and settle on paying off a portion of your debt. Again, creditors aren’t terribly keen on trying for a judgement against you if they don’t have to, and, in the end, just want to collect as much of their outstanding balance as possible. A settlement could be the way to do it.

With a settlement, you’ll have to pay a lump sum up front. So, you’ll need to make sure you have the cash to do it. But, in the end, it’ll be less expensive than the outstanding debt you have with that particular company, and you won’t still be accruing debt with late payments. It’s also a better alternative than declaring bankruptcy to preserve your credit.

If you want to pursue settlement, we highly recommend going directly to the credit card company or your bank—whoever issued your credit card. That way, you’ll be certain to avoid a business loan scam.

7. Declare bankruptcy.

Filing for bankruptcy should be—and is—a last-resort option. But if you’ve run out of alternatives to recover from business credit card debt, you should know what’s involved in filing for business bankruptcy or personal bankruptcy.

Chapter 11 business bankruptcy will allow you to create and submit a reorganization plan for your business, including a proposal to restructure your finances. Here, everything is out on the table—assets and liabilities—so your plan can be approved in bankruptcy court. You’ll get legal protection in the form of a stay for the time being while you create your plan, which is a good thing, as well as the opportunity to recover and stay open in the long run. But the Chapter 11 process is not an easy out—and a decision will stay on your credit report for up to a decade.

If your business absolutely can’t pay, is entirely liquidated, or is shuttered and your business credit card debts have been passed on to become your personal debts, small business owners can file for Chapter 7 personal bankruptcy. With Chapter 7, your business credit card debts can be relieved once your case is settled. But, of course, you’ll then have a personal bankruptcy on your personal credit history.   

Rebuild Your Credit to Fully Recover From Business Credit Card Debt

About a third of business owners use a business credit card. And, if you want to continue to be among them, you’ll want to make sure that you focus on rebuilding your credit. Creditors have to be able to trust you with debt again.

But rebuilding your credit doesn’t just affect your ability to qualify for good business credit cards down the line—you’ll need strong business credit history to qualify for business financing. Plus, the stronger your score, the better terms you’ll be able to secure with lenders. Translation: Cheaper capital.

As soon as you can, try applying for a secured credit card with the explicit intention of rebuilding your credit. With a secured credit card, you provide a security deposit for your credit line; that way, if you don’t repay, the card issuer will just keep the deposit. (But you will pay your bill in full and on time this time around—that’s how you build credit!) Continue to make consistent payments, and you’ll begin to incrementally see your credit score recover.

Understand also that, due to your recent track record with debt repayment, many vendors might require cash or upfront payment before they begin working with you on credit again. But once you’re able to rebuild their trust, you can begin to use trade credit—otherwise known as net terms—to begin to build up your business credit.

Your steps to recover from business business credit card debt will be numerous, sure. But they’re worth the work. Digging out from under debt, regaining the trust of creditors, lenders, and vendors, and ultimately rebuilding your credit score will set you up to be successful going forward—and never land in business credit card debt again.

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