The number of outstanding small-business loans of less than $100,000 increased 25 percent between June 2004 and June 2005, according to a report last month by the Office of Advocacy of the U.S. Small Business Administration.
The report – based on a study of reports from U.S. lenders – suggests that the increase came mostly from small businesses’ use of credit cards, although some local lending institutions do not agree.
Just as consumers have been inundated with credit card applications, so have businesses, said Stephen Bessette, executive vice president of consumer, mortgage and small business lending at The Washington Trust Co.
But it isn’t only local banks that are trying to grow the lucrative credit card business, he said. Financial institutions such as American Express and Capital One also contribute to the flooding of the market.
The result is increased usage of credit cards, leading to greater accumulation of debt. And that can be a problem.
“Too much debt financing is dangerous … because it tends to be used without using the discipline of cash-flow management,” said John Cronin, executive director of the R.I. Small Business Development Center at Johnson & Wales University.
For many small business owners, a credit card seems an easy way to avoid putting in the time and effort required to apply for a micro or small business loan, Cronin said.
“Entrepreneurs generally feel they need fast turnaround to get their businesses going,” he added. But credit cards, he said, aren’t the best way to go.
“It’s worth the time to invest in the relationship with the bank or micro-loan lender … because over the long run, you can negotiate better and better rates,” Cronin said, “and it establishes a track record.”
Yet Joseph Rocchio, vice president and community banking business officer at Sovereign Bank, said banks promote business credit cards because they are a good product.
Philip Friend, senior vice president of consumer, mortgage and small business lending at Washington Trust, offered a similar view. Yes, small-business credit cards are profitable for the banks, he said, with high interest rates and relatively low losses. But that’s not why banks promote them, he said.
“We try to match our customers by what their needs are, not what our needs are,” Friend said.
And that may be the most logical explanation for the rise in loans of less than $100,000, said Washington Trust’s Bessette. “Banks have generally become more aware that smaller business lending is a profitable activity.”
“Our small business loans are up in dollars, about 50 percent from 2005 to 2006, mostly because of our focus on it,” Bessette said.
Gary Heidel, senior vice president of small business services and national director of SBA programs at Citizens Bank, agreed that blaming the increase in smaller business loans on credit card activity would be unfair.
“We have multiple products available to small businesses,” Heidel said.
Citizens has seen an increase in number of loans it issues for less than $100,000 because the number of smaller small businesses is growing, he said. Businesses with fewer than 20 employees, for example, have lesser credit demands.
“That’s what’s driving it,” Heidel said. “It’s really the market.”
Despite the lure of easy credit, however, Sherri Carrera, operations manager for Every Company Counts, a small-business program at the R.I. Economic Development Corporation, said it’s important to tell cautionary tales.
“I have seen too many businesses get in trouble by financing their businesses on credit cards, and they end up coming to us for a microloan when they can’t meet their credit card bills,” Carrera said.
“By that time, it’s usually too late, and their credit score is damaged.”
