Credit Protections: How They Differ for Consumers and Businesses
Do you know the key differences?
As a small business owner, you may use a combination of business and personal credit products, such as loans, credit cards, or debit cards. Although the business and consumer versions of credit products seem similar, there are important differences in the consumer credit protections offered to small business owners.
Most financial regulations and rights in place don’t apply to business accounts—they only apply to consumer accounts.
Here are six key protections that consumers have, but small business owners don’t.
Free Credit Reports
Under the federal Fair Credit Reporting Act (FCRA), consumers are entitled to a free copy of their consumer report every 12 months from the major credit reporting agencies. This includes Equifax, Experian, and Transunion, along with specialty reporting agencies. Consumers are also entitled to a free credit report in the event of “adverse action” (such as being turned down or charged more for credit), if unemployed and seeking employment, or if you believe your report is inaccurate due to fraud.
However, when it comes to small businesses, no law requires credit bureaus to provide free copies of a business credit report, which may include basic contact and address information, legal filings, and inquiries. However, it is possible to find and get your own copy of a free business credit report.
Free Credit Scores
If a credit score in any way played a role in adverse action (such as being turned down or charged more for credit), a consumer is entitled to get the credit score used to make the decision. This disclosure will also include the credit score range and the top four factors impacting your score.
However, business owners are not entitled to a free business credit score, though these scores are mostly provided for a fee. A few sites that provide free business credit scores include Nav and MyCreditsafe.
Credit Card Protections
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit CARD Act) provides consumers with a variety of credit card protections, including limiting late or penalty fees to “reasonable and proportional” and 45 days advance notice when significantly changing account terms, including interest rates.
The Credit CARD Act doesn’t cover business credit cards, which can result in a wide variety of problems for small-business owners. Issuers can change interest rates or account terms whenever they wish, or apply any extra payments you make toward whatever they decide, not your highest-interest-rate balance.
Some business card issuers have adopted cardholder protections on a voluntary basis. Read the cardholder agreement’s terms for your business credit card account. Set up automatic payments to avoid paying late and triggering a rate increase.
Credit or Loan Rejections
If you are turned down for credit or a loan, charged more for credit or a loan, or if a creditor closed your account, you may be entitled to certain credit-related details in writing, regarding that “adverse action.” Two consumer protection laws, the FCRA and the Equal Credit Opportunity Act (ECOA), require:
- A statement of the action taken by the creditor (such as the application was rejected)
- Specific reasons for that action, or information on how to obtain those reasons in writing
- Information on ordering a free copy of the credit report used in the decision (if applicable)
The FCRA does not apply to business credit decisions. However, the ECOA does provide some assistance to small business owners. For businesses with annual revenues of $1 million or less, the creditor must tell you how to request the reasons you were turned down at some point (including when you’re first applying for credit). The adverse action may be provided verbally or in writing.
Read the credit card application carefully, and ask the lender for more details if your application is rejected, following the procedure outlined for you at the start.
Debit Card Fraud Protections
If someone uses your consumer debit card, the Electronic Funds Transfer Act (EFTA) generally limits your liability to as little as the first $50 in fraudulent charges, provided you notify your bank of the use within 60 days. If you report it, your financial institution must generally investigate fraudulent use and either complete the investigation within 10 business days or provisionally credit your account.
Business debit card losses are not covered by the EFTA, and business owners may only have 24 hours to report misuse. Some issuers offer “zero-liability” provisions for small business debit cards used fraudulently, although the process of freezing, investigating, and crediting your account may vary, depending on the issuer.
Set up alerts for transactions and check your business banking accounts daily.
Interest Rates and APRs
The Truth In Lending Act (TILA) generally requires consumer lenders to disclose an annual percentage rate (APR) which helps consumers understand the cost of the credit or debt over a one year period. For example, credit card issuers must disclose APRs on credit card applications and solicitations.
Small business loans are not covered by these disclosure requirements. Lenders offering commercial financing may describe the cost of credit or debt in a variety of ways that may be confusing to the small business borrower.
Make sure you understand the cost of any business financing you are considering. Don’t assume that the word “rate” means the lender is disclosing an APR.
The Bottom Line on Small Business Credit Protections
Although some politicians have recently advanced the idea of extending consumer protections to small businesses, they’re not in place as of March 2020. Protect yourself by reading cardholder and loan agreements carefully and monitoring your credit score and history.