New Law Requires Ownership to be Reported on Business Credit Card Applications
A new law may require many businesses to report ownership on business credit card applications. Here’s everything you need to know about the ‘beneficial owner’ rule and how it could affect you and your business.
Getting a new credit card for your business is fairly common, but a new law may bring additional complications and requirements for some business credit card applications.
Most businesses will need access to capital, whether for working capital, large purchases of inventory or equipment, or expansion into a new market. Business financing comes in many different forms, with the most common being business credit cards and small business loans. A new federal rule known as the Beneficial Owner rule aimed to reduce money laundering went into effect in May, and it has had an impact on how businesses can get credit cards and loans.
The updated regulation adds nuances to business credit card applications and loan paperwork that requires companies to share specifics about the business owner. Business owners should recognize what this new law means for getting access to financing.
‘Beneficial Owner’ Rule
The Beneficial Owner rule’s official title is the Customer Due Diligence Requirements for Financial Institutions, or CDD rule. Enacted by the U.S. Department of the Treasury and the Financial Crimes Enforcement Network (FinCEN), the new law for business credit card applications requires certain financial institutions to take more stringent steps to identify and document certain owners of a business operation.
The law is meant to help financial institutions better understand who is behind the scenes through the collection of detailed information on all beneficial owners. The hope is that with more data on beneficial owners, financial institutions will have more control in limiting nefarious transactions among anonymous parties indirectly or directly involved in company operations.
Now, business credit card applications with a covered institution will require not only information regarding business financials and personal credit details on the owner, but also on the “beneficial owners.” Determining who is a beneficial owner in a company can be a bit challenging depending on the structure of the business, the number of partners included in business operations, and who is calling the shots behind the scenes.
The complexities of determining who a beneficial owner is and the requirements of adding their information on a new business credit card application may make approval for new credit more daunting for some companies.
How to Determine Who Is a Beneficial Owner
Each business, large or small, has a different structure than the next, and the number of individuals involved in business operations or monetary transactions may also differ. However, FinCEN has laid out some guidance as to who is considered a beneficial owner under the new law for business credit card applications. Put simply, a beneficial owner is anyone who is a direct owner of a company who owns at least 25% of the business.
The best way to determine who is a beneficial owner in a business with a complex structure or multiple layers of ownership is to have a tax professional or business consultant untangle the web of owners. It is necessary for companies to have a clear idea of who falls into the category of beneficial owner before submitting new business credit card applications with any financial institution.
How the Rule Changes Business Loan and Credit Card Applications
Getting approval for a business credit card has historically been straightforward for most companies. The application process requires information about the structure of the business, details about the personal credit history and financial standing of the business owner applying, and in some cases, a personal guarantee of the applicant to ensure the financial institution is not taking on undue risk.
However, under the new law for business credit card applications, details for both the business owner and any additional beneficial owners must also be included. Beneficial owners are not treated exactly as additional applicants, but their full name, social security number, date of birth, and personal address history are included as part of the business credit card application.
The biggest change with the beneficial owner rule for companies is this added level of details for ancillary business owners. However, there have been no notable changes in how financial institutions review the basic information required to apply for new business credit card applications.
A company needs to have strong financial standing along with a relatively strong credit history for all owners included on an application to qualify. Businesses also may be asked to offer up collateral to help offset the risk of new financing, or a personal guarantee as a promise to pay out of personal assets should the business default.
The CDD rule is far-reaching for both financial institutions and business owners applying for new credit cards and loans. However, there are a handful of business exemptions that exist within the new federal law. The following legal entities are exempt:
- Natural persons
- Sole proprietorships
- Unincorporated associations, such as neighborhood associations
- Publicly held companies
- Entities registered with the SEC
Additionally, businesses that do not have any owners that have a stake in the company of 25% or more are not required to provide personal information on ancillary owners.
The Bottom Line
The new rule for business credit card applications and loans only applies to companies that have beneficial owners as part of their legal business structure. For those who fall into this category, it is important to provide the information required by financial institutions for all beneficial owners. This includes full name, address, date of birth, and social security number. While adding this information to a new business credit card application may take more time, it is necessary in thwarting financial crimes and money laundering, which should ultimately benefit businesses large and small.
Author: Melissa Horton
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