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December 10, 2014

Best Practices: Documenting Business Credit Card Debt on a Personal Credit Card

by Starfield & Smith

Refinancing business credit card debt is one permissible use of SBA loan proceeds. The key word, however, is business credit card debt. When a “corporate” credit card is being refinanced, the borrower benefits from a presumption that the borrower used the card solely for business purposes. The required documentation is fairly straightforward: the lender needs the most recent account statement and a certification from the borrower that the borrower used the card solely for business purposes.

But where the credit card is in an individual’s name, the documentation requirements are much more onerous. The lender must collect all statements showing the business charges being refinanced, provide the underlying receipts for business charges over $100 and a certification that loan proceeds are only being used to refinance business debt. This article addresses the perils of refinancing business debt that appears on an individual’s personal credit card.

Lenders are frequently tempted to take shortcuts in documenting such business credit card debt. The documentation can be voluminous and the card holder’s records can be spotty at best. Also, the pressures to close the loan quickly may make the proper gathering and analysis of credit card documentation appear to be an inefficient use of time and resources.

But failing to properly document the business purpose of personal credit card debt can be much costlier, if not disastrous, for the lender if the loan goes into liquidation. Any inadequacy in the credit card documentation will directly correlate to a repair or denial of the lender’s guaranty.

The simple problem is that the onus is on the lender to prove that loan proceeds were only used to refinance business expenses. If the business debt is on a personal credit card, the lender cannot rely solely on a certification from the borrower to prove the business nature of the debt being refinanced.

Prior to closing, a lender should obtain copies of all personal credit card statements showing the business charges being refinanced. The most recent statement does not suffice because the SBA will need to see each line item for the purported business charges, not just the balance on the card. In order to confirm the charges were for legitimate business purposes, the SBA also requires copies of all the invoices/receipts supporting the business charges.

Although gathering and reviewing all of this detailed documentation prior to closing can be tedious and time consuming, the alternative is much costlier for the lender if the loan goes into liquidation. Once in liquidation, obtaining this documentation is much more difficult, if not impossible. The borrower can become uncooperative or the borrower could have lost or discarded the supporting documentation. The lender will face a repair for every credit card charge the lender cannot document properly as a legitimate business expense. Even though each line item may only be a few hundred dollars, they quickly add up when several of them are not documented properly.

Our best advice is to take the time prior to closing to collect all of the appropriate documentation. If there are holes in the borrower’s documentation, the lender likely can reduce the loan amount to exclude the credit card debt that cannot properly be documented. Such an approach will insulate the lender from facing a repair if the loan goes into liquidation. In this circumstance, a lack of haste can prevent waste.

For more information regarding refinancing credit card debt, please contact Greg at 267-390-1023 or at gkupniewski@starfieldsmith.com.