by Marshall Kirby, Public Policy Analyst
By and large, Americans utilize credit for a sizable percentage of all transactions. Whether it is mortgages, auto loans, student loans, personal loans, or credit cards, financing purchases is a simple fact of the current economy in the United States. There has been a lot of news during the recession about bank bailouts under TARP, high foreclosure and default rates, individuals and families immersed in credit card debt, and lack of credit available to businesses. Legislation has been passed regarding credit cards for consumers and the Obama Administration has attempted to extend lines of credit to businesses through the Small Business Administration and has urged banks to lend to qualified businesses. Despite the pleas and lines of credit available to businesses and entrepreneurs, it still has not been adequate to address the needs of business owners and managers to finance their growth and operations.
Enter credit cards. Despite the credit card reform act which was enacted in 2009, credit card companies appear to be expanding their efforts to extend lines of credit to businesses. Credit card companies under the CARD Act (Credit Card Accountability, Responsibility, and Disclosure) were forced to give relief to consumer card holders from excessive fines, fees, and interest rate hikes. As a result, many card companies have reduced consumer credit lines and have enacted more stringent lending practices which have lowered overall access to credit. However, there has been no legislative equivalent to the CARD Act for business credit cards. In fact, in October 2010, the Federal Reserve announced that neither they nor the Federal government will attempt to enact the same protections for business credit cards.
Business credit cards are not as plentiful as consumer credit cards, and according to data, only 15% of all spending from credit cards is from businesses. However, it seems that the card issuing companies are aggressively targeting businesses of all sizes – in particular small businesses. Between 1999 and 2009, the monthly balances of all business credit cards have more than doubled. In 1999, the balance utilization ratio on business credit cards was 5.9%, but by 2009 it was 12.3%.
This is a double edged sword for businesses and many would-be entrepreneurs. With credit very tight right now, businesses can be tempted to take these high interest cards as a way to finance their operations and dreams of owning a business. However, with interest and fees on these cards being very high, using these cards taps heavily into profit margins. Using too much can threaten the future of the company.
It is important for all business owners and entrepreneurs who are shopping for lines of credit to do their research and seek sound advice from professionals. There are still options for businesses needing credit, and it is important that all possible options be exhausted before pursuing financing through credit cards. Be sure to look into local networks of angel investors, private equity groups, and SBA grants which many times are the best option. Simply put, placing large amounts of debt onto credit cards and paying them off gradually is too risky of a practice given the state of economy. If you use business credit cards, try to make it your goal to pay them off in full or as much as possible each month.
Looking to the future, business owners and advocates need to work in concert to raise awareness for the credit crisis affecting small and medium sized businesses. Getting this message out to elected leaders and bankers will hopefully yield positive results as they will see the true demand for beneficial loans to businesses which can grow our economy and make us all more prosperous.
Mr. Kirby joins The National Puerto Rican Chamber of Commerce with an experienced background in Public Policy Analysis. He has worked for Americans for Informed Democracy, the Center for US Global Engagement, and for local governments in Virginia on issues ranging from international finance, national security, and other areas of foreign and domestic policy. He holds a Master of International Development Degree from the University of Pittsburgh.
Marshall can be reached at 866-576-5222 x 8, or MarshallK@NPRChamber.org.