I have always been afraid of banks.
—Andrew Jackson, seventh president, United States of America.
One of the worst things you can do as an entrepreneur is to open a business bank account at a bank where you have a personal bank account. Likewise, it is not a good idea to open a business credit card at the same bank where you have a personal account. Should you ever have a financial problem with your business bank account or business credit card, your personal accounts will be affected negatively and vice versa.
Entrepreneurs often set up some or all of their banks accounts with the same bank for what they consider good reasons, but they do so without thinking of or knowing the consequences. For example, convenience is perhaps the most common reason. They prefer to go to the same bank, not several different banks, to make multiple transactions. Entrepreneurs are all about being efficient and saving time, but this benefit is nominal. Moreover, many entrepreneurs succumb to the banks’ clever marketing and special offers that give privileges (like reward points or exempted fees) to customers who open multiple accounts. Entrepreneurs are all about saving money, but this, too, is not worth the small benefit.
So what’s the problem? The problem is that banks don’t treat multiple accounts they have linked to the same person separately. Regardless of what the accountholder may think or the impression the banks may give, all of your accounts are linked together by your Social Security number and tax identification number. Unfortunately, the common misconception is that business accounts and personal accounts are somehow not connected and treated as separate liabilities. This is not always the case. While this may have been truer in the past, our sluggish economy has caused banks to change their methods of debt collection and to tighten their terms. Some banks are stricter than others.
An alarming but little-known problem is the fact that more business owners are experiencing a phenomenon known as veil piercing, a term used in corporate law that describes disregard for corporate entities. In other words, business owners who have set up a corporation to avoid personal liability are discovering that they can, in fact, be liable for certain debts. Banks and credit card companies are becoming more aggressive in pursuing debts. In fact, some are pushing the limits of their contractual abilities by overstepping legal boundaries to intimidate customers. Such coercive actions have spawned a deluge of complaints and lawsuits.
Also, to better manage risk and prevent losses, banks are more actively using the right of offset. Having multiple accounts with a bank makes it much easier for banks to go after debts and faster. For example, through right of offset, a bank can legally seize deposited funds to cover a loan that is in default. Imagine you missed a $750 loan payment for your business, and unexpectedly that exact amount is deducted from another bank account. That could spark many problems, costing you overdraft fees and one big headache. It happens frequently. What makes the matter trickier is that different states and different types of banks follow different right of offset laws.
In another disconcerting trend, business owners are beginning to see business credit card debts show up on their personal credit reports. Discover, for instance, has openly admitted to reporting business debts for placement on personal credit reports. Likewise, CapitalOne reports business debt of its credit card holders on personal credit reports. Most companies do not do this, but more are considering the policy. Also, know that if you have a personal credit card and business credit card with American Express, for example, it is monitoring your overall debt, not each account separately.
Unfortunately, many business owners have been denied personal credit because they were unaware that their business credit is now reported to personal credit bureaus. In one horror story, a business owner’s business credit card company started to report to personal credit bureaus a few weeks before he planned to close on his new home. The company failed to communicate its new policy. As a result, his debt-to-income ratios worsened and his credit score tanked. He was denied a mortgage and was crushed.
In brief, always open your business bank account or business credit card with a bank that is not affiliated with the bank where you conduct important (especially personal) finances. By doing this, you minimize your risk of the bank doing something to jeopardize your financial welfare. Furthermore, read your terms for accounts and loans as if your life depended on it, and ask questions if you don’t understand. You must have a strategy when opening bank accounts and applying for credit cards for your business, because they have a major effect on your financial future. If you don’t take this crucial step, you are headed for disaster.