Credit Guidance for Founders

Avoid The Hidden Trap: Founder Liability

Founders have the odds stacked against them. While many founders dream of building the next successful “unicorn,” only a select few succeed. Beyond the steep rate of failure, when founders launch a new business, they take on a tremendous amount of personal financial risk. And, for a variety of reasons, founders aren't fully aware of how exposed they really are.

How do personal guarantees work?

A personal guarantee is a commitment by the founder or other business leader to personally pay their business debt if the company is unable to. If a founder signs a personal guarantee and defaults on that credit card payment, their personal credit score and assets could be affected.

Personal guarantees are very common in small business financing. In fact, according to a 2018 Federal Reserve study, 86% of businesses used personal credit scores to obtain financing.

What are the personal implications?

Banks typically bury “personal liability” clauses in pages and pages of terms and conditions. That means that business leaders often won't know that they've placed their personal assets on the line in exchange for business credit card financing.

How is my credit score impacted?

Most major credit cards and banks perform a “hard pull” on your credit, tying your personal credit to their underwriting decision. The consequences of a delayed payment or default could cause a founder's credit score to fall by over 100 points. In addition, late payments and collections can remain on personal credit reports for up to seven years.

What is “Joint & Several Liability” ?

Some financial providers use the term “Joint and Several Liability” in their terms and conditions. This means that everyone signing the agreement is liable for the full amount owed, impacting you in two important ways.

First, as soon as your card payment is due, the bank has the right to take the full amount owed from your personal bank account, even if the company has funds available. Second, if you have more than one personal guarantor—say you and your cofounder—the issuer can go after either guarantor for 100% of the amount owed.

All of this combined can have dire consequences for founders and business leaders. In fact, up to 60% of startup founders have paid $50,000+ in personal assets to pay off business debt.

Leveling the playing field for founders

Brex was born from a frustration with the financial status quo, and our cofounders know firsthand the roadblocks to acquiring credit. But it doesn't have to be this way. Brex is leveling the playing field by offering a corporate card without a personal guarantee, security deposit, or collateral.

With an innovative underwriting model, Brex assesses companies based on factors that matter – like cash in the bank and activity in the business – to assess your approval and credit limit decision. In addition, we don't ask for joint and several liability.  

In doing so, Brex ensures that founders and early employees are not putting their personal credit scores on the line during one of the riskiest junctures in their lives—starting a company.