It’s a risky trend for businesses
A record number of small business owners are financing their operations by credit card, according to a report recently published by the U.S. Small Business Administration.
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Overall, the number of bank micro-business loans of under $100,000 went up 10.1 percent between June 2000 and June 2001, according to the report. However, banks with significant small business credit card operations accounted for virtually all of the growth in lending to small businesses: micro-loans extended in the form of business credit cards grew 17.3 percent, to $140 billion.
At the same time, growth rates in non-credit-card-related loans of under $100,000 declined, from 4.4 percent to 2.3 percent in the amount, and less than 1 percent in the number of loans, according to the SBA’s “2001 Micro-Business-Friendly Banks in the United States.”
The report was written to help small firms identify banks in each state that lead the industry in lending to small businesses.
The spike in the number of small business owners bankrolling their enterprises with plastic mirrors another trend in the business-lending industry: in recent years, banks have been promoting and issuing small business credit cards at unprecedented levels, say experts. All of a sudden, banks are waking up to the fact that small business credit cards generate a huge amount of money, say industry insiders.
“Banks always want to find new lending opportunities, and the small business sector has caught their eye,” said Charles Ou, an SBA senior economist and the author of the report. “They can do it at very low cost, and the credit card operation is convenient to small firms. They have been pushing it especially in the last three years, and that of course shows in the statistics.”
Card companies were especially active in micro-business loans, according to the report, which was published in late August. Issuers made 19 percent more of these loans in the 12 months that ended in June 2001, compared with a 0.4 percent increase in larger traditional bank loans. Card companies’ micro-business receivables rose 35 percent in the period, to $10.7 billion, against a 2.3 percent increase, to $116.1 billion, at banks.
“It appears that much of the growth in micro-loans has been due to the promotion of credit cards by major banks and finance companies,” said Thomas M. Sullivan, the chief counsel for the advocacy office.
The SBA study did not include data on business owners who finance their operations with the use of personal credit cards. A factoring in of those statistics would probably show that businesses are being financed by credit cards at a rate unparalleled at any time, said Ou.
Unlike personal credit cards that typically charge between18 percent and 21 percent in interest rate, most business credit cards offer interest rates of approximately 8 percent, said Ou.
Many business owners are undoubtedly turning to credit cards because more traditional bank loans aren’t available, say experts.
“With the recent slowdown in the economy, we do see that lending to small businesses has not increased. But the banks did push into this credit card market. It’s an additional source of credit that small businesses can use at a time when other lending is down,” said Ou. “If they use it with care, it should benefit them.”
In a local example of the trend, Citizens Bank rolled out its SBA-guaranteed business Visa Card in the summer of 2001 – making the bank one of a handful in the nation that offers an SBA-guaranteed credit card.
Since it was made available to business customers, Citizens Bank has seen steady growth in the product, said Gary Heidel, director of government-guaranteed programs for Citizens Bank.
Many bankers report that small business owners use their business credit cards in different ways than they use traditional bank loans. While loans are typically accessed and paid back over the course of many years, credit cards are mostly utilized for short-term needs, they say.
An examination of call reports on business credit cards shows that a majority of card owners maintain a loan balance well below their credit line, said Ou.
“It affords small business borrower the ability to handle day to day business expenses with greater ease and convenience. It’s not as easy to pull out the cash on a traditional bank loan when you need some cash for your business,” said Heidel.
Small business owners who use their business credit cards to pay business expenses do so for the same reasons that most Americans like to use credit cards, say experts: they like the ease of purchasing and purchasing discounts often available. Business owners appreciate that they receive an itemized monthly bill, eliminating the need for bookkeeping.
Another reason many first-time small business owners choose a card is that they may not qualify for a traditional bank loan, said Ou.
“The traditional loans takes longer. In many cases it’s just much more difficult to obtain if you don’t have collateral,” said Ou.
Still, some people have concerns about the great number of businesses now dependent on credit cards.
“My concern is that [business owners] are not looking at their options. There are credit cards they can find with lower rates, but there also other options through guaranteed loans. Small businesses today have to count their pennies,” said Mark Hayward, district director for the U.S. Small Business Administration.
But banks are careful to offer business credit cards to business owners with good credit. As a result, most business credit card owners are meeting their financial obligations.
“They will use it and they will repay it quickly. It’s a convenience to them,” said Ou. “Of course, that doesn’t mean there are not people who will be hurt because they will use credit without reservation and get burned by high interest. But most of the small business people know about the high costs associated with not keeping up with monthly payments. So actually, when you look at these loan balances on these credit card accounts, they’re not that high.”
“The business credit card trend is a good thing as long as it’s not replacing the other types of loans,” he said.
