Understanding Key Differences in Consumer Credit Protections for Small Business Owners
As a small business owner, you might use a mix of personal and business credit products, such as loans, credit cards, or debit cards. While these credit products can appear similar at first glance, there are significant differences between the consumer credit protections available to individuals and those offered to small business owners. It's crucial to understand these differences to better protect yourself and make informed financial decisions for your business.
Most financial regulations and rights apply only to consumer accounts, not to business accounts. Here, we highlight six key consumer credit protections that small business owners don't have access to.
1. Access to Free Credit Reports
Consumers
Under the Fair Credit Reporting Act (FCRA), consumers are entitled to receive a free copy of their credit report every 12 months from major credit reporting agencies, such as Equifax, Experian, and TransUnion. Consumers also qualify for a free report when facing adverse actions, such as being denied credit, or if inaccuracies are suspected due to fraud.
Example: Imagine you are applying for a personal loan and get denied. Thanks to the FCRA, you can request a free credit report to understand what influenced that decision, making it easier for you to address any issues in your credit history.
Small Businesses
However, for small businesses, there is no legal obligation for credit bureaus to provide free business credit reports. Business credit reports typically include contact details, legal filings, and credit inquiries. It is possible, though, to find free versions through third-party services.
Actionable Tip: Consider using services like Nav or Creditsafe, which provide free access to some business credit information. Regularly reviewing your business credit report can help you stay proactive.
2. Free Credit Scores
Consumers
When a credit score plays a role in adverse actions (like being denied credit), consumers are entitled to access the credit score used in that decision. They also get to see the score range and the key factors affecting it.
Example: If your credit card application is denied, the creditor must provide the credit score used and the top factors that influenced your score. This allows you to know where to improve.
Small Businesses
Small business owners, however, are not legally entitled to a free credit score. Most business credit scores come at a cost, though some services like Nav and MyCreditsafe offer free business credit score checks.
Actionable Tip: Take advantage of any free credit score services for small businesses to stay aware of your financial standing without incurring additional costs.
3. Credit Card Protections
Consumers
The Credit CARD Act of 2009 offers protections for consumers, such as limiting late fees and ensuring 45 days' notice before changing account terms, including interest rate hikes.
Example: If you have a personal credit card, the issuer must notify you 45 days before raising your interest rate, giving you time to prepare or pay off the balance.
Small Businesses
Unfortunately, the Credit CARD Act does not cover business credit cards. This means issuers can alter interest rates or terms at any time. They may also decide how extra payments are applied, possibly not to your highest-interest balance. While some business credit card issuers voluntarily provide consumer-like protections, it's crucial to review the terms carefully and set up automatic payments to avoid late fees.
Actionable Tip: Set up automatic payments on your business credit card to avoid missed payments and potential rate hikes. Always read your card agreement thoroughly to understand your rights.
4. Credit or Loan Rejection Notices
Consumers
If turned down for credit, consumers are entitled to written details explaining the reasons, thanks to the FCRA and the Equal Credit Opportunity Act (ECOA). This includes the specific reasons for the adverse action and information on obtaining the report used.
Example: Suppose your personal loan application is denied. You will receive a notice detailing why, which helps you understand areas you need to improve.
Small Businesses
While the FCRA does not apply to small business credit decisions, ECOA provides some rights. For businesses with annual revenue of less than $1 million, creditors must inform owners how to request the reasons for being turned down. This response may be either verbal or written.
Actionable Tip: If your business is denied credit, ask for an explanation. Knowing why you were denied can help you improve your creditworthiness for future applications.
5. Debit Card Fraud Protections
Consumers
The Electronic Funds Transfer Act (EFTA) limits a consumer’s liability for fraudulent debit card use to $50, provided that it is reported within 60 days. If reported, financial institutions are obligated to investigate the claim and resolve it within 10 business days.
Example: If your debit card is stolen, as long as you report the unauthorized use quickly, your liability is capped, and your bank must help resolve the issue.
Small Businesses
Business debit cards are not covered by the EFTA. Business owners may have as little as 24 hours to report fraudulent activity. Some issuers do offer zero-liability provisions for fraudulent use, but the rules vary. To reduce risk, it's advisable to set up transaction alerts and monitor your accounts daily.
Actionable Tip: Set up real-time alerts for all transactions on your business debit card to catch and report any unauthorized charges immediately.
6. Interest Rate and APR Disclosures
Consumers
The Truth In Lending Act (TILA) requires lenders to disclose an annual percentage rate (APR), helping consumers understand the cost of credit over a year. This makes comparing different credit products easier.
Example: When applying for a credit card, TILA ensures you know the APR upfront, allowing for a more informed decision.
Small Businesses
However, business loans are not covered by TILA requirements, which means lenders might present the cost of credit in less straightforward ways. Business borrowers should be diligent, ask questions, and make sure they understand all the terms before proceeding.
Actionable Tip: Always ask for clarification on any fees or interest rates for business loans. Compare different offers carefully to understand the true cost.
Conclusion: Key Takeaways for Small Business Owners
The lack of equivalent protections for small business credit compared to consumer credit can expose business owners to additional risks. Being proactive and well-informed is the best defense: review credit card agreements thoroughly, set up alerts for transactions, and monitor your accounts regularly. By understanding the differences in credit protections, you can make informed decisions that better support the financial health of your business.
Emotional Appeal: Running a small business is challenging, and every decision counts. Equip yourself with the right knowledge and take proactive measures to protect your financial health. Stay informed, stay vigilant, and build a more secure financial future for your business.
FAQs
- How can I get a free business credit report?
While not legally mandated, some platforms like Nav and MyCreditsafe provide free access to business credit reports. - Are there any protections for business credit cards similar to consumer cards?
Some issuers voluntarily provide protections, but it’s essential to read the cardholder agreement thoroughly. - What happens if my business debit card is used fraudulently?
You may not have the same protections as a consumer, but some issuers offer zero liability. Always report issues quickly. - Why wasn’t I given a reason for my business credit rejection?
If your revenue is below $1 million, you have the right to request an explanation under the ECOA. - How can I protect myself from business credit card interest rate hikes?
Setting up automatic payments and thoroughly reviewing your cardholder agreement can help you avoid unexpected rate increases. - Are business loans required to disclose APR?
No, business loans do not have to disclose APR. Always ask for clarification on costs to fully understand the terms.
Do you have more questions about protecting your business finances? Feel free to leave a comment below or check out our next post on building a solid business credit profile.
