Credit Cards Replace Small Business Loans

By JOHN TOZZI, BUSINESSWEEK.COM
Posted: 2008-10-15 23:54:25
Filed Under: Small Business Finance, Small Business Funding, Small Business
BusinessWeek

As commercial loans become harder to find, small business owners give in to aggressive credit card marketers and get slammed with 30% interest rates.

The 30% interest rate on their small business credit card shocked James and Heather Hills enough to stop using it entirely in April. The couple had turned to credit cards in early 2006 to get their Elgin (Ill.) startup, mhn Internet Marketing and PR, off the ground, after three loan officers told them that they wouldn't qualify for a bank loan without capital equipment to put up as collateral. So the Hills, who have no outside employees, took out a $50,000 home equity line of credit and two personally guaranteed small business credit cards.

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    They had a handle on their debt until a partner abandoned a planned joint venture in March 2007 and the Hills were left with almost $10,000 for the project on their Advanta card. Since then, they say they've been late on a couple of payments, and their interest rate has steadily increased from 11.74% to 30.99%. "It suddenly starts being several hundred dollars worth of interest charges," James Hills says. Even without new purchases, they don't expect to pay off the remaining debt, still over $6,000, before 2009. (Advanta, citing privacy laws, declined to comment.)

    Expensive Seed Money
    While data on small business borrowing is scattered, indications show that entrepreneurs are increasingly relying on credit cards to finance their businesses, especially early-stage companies. The percentage of firms using credit cards has jumped from 16% in 1993 to 44% today, according to surveys by the National Small Business Association, a trade group. In the same period, the proportion using bank loans dropped from 45% to 28%. A Federal Reserve survey showed that the percentage of firms using business credit cards jumped from 34% in 1998 to 48% in 2003. And numbers from the NSBA and the Fed show that between 20% and 30% of all small businesses carry a revolving credit-card balance, rather than paying their bills in full each month.

    "We don't have an alternative right now," says NSBA chair Marilyn Landis, a former bank executive who now runs Basic Business Concepts, a financial consulting business. "If there were alternatives, business owners would go there." It's a particular problem for service or information companies that don't have equipment or inventory to secure commercial loans. In testimony before the Senate Small Business Committee in April, Landis described applying for bank lines of credit and receiving credit cards instead. But relying on cards, rather than on fixed-rate loans or credit lines, can saddle small companies with unexpected and expensive debt.

    A Growth Market for Credit
    Over the last decade, credit-card companies have courted small business owners as issuers try to expand beyond the saturated consumer card market. Some 12% of the 6 billion credit-card offers mailed each year promote small business credit cards, according to Mercator Advisory Group, an industry researcher. That's 720 million offers, or roughly 26 for each small firm in the U.S. "As issuers have discovered the small business segment, they have become fairly aggressive about getting small business cards into the hands of some very early-stage businesses," says Mercator analyst Ken Paterson.

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    107 comments

    sohoguruess 12:20:15 AM Mar 02 2009

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    Wamu and First Equity EH? Seems like those two are out to get all SOHO's. Now that WAMU is CHASE - beware. They have added a $120.00 annual fee and now will be requiring a higher "minimum" payment. From what I understand it will be 5% of the balance instead of 2%. So, that makes it harder to "double up" payments to get to the principle each month.I read on http://www.fuckedupblog.com that there is going to be a protest on March 29, 2009 - where you cut up your cards and mail one (or some of the cut up card) to each of your state representatives. I have a First Equity and the interest is also 32.99% - no late payments and always paid more than minimum for 4 years now.32.99% !!!!!!!!!!I truly am considering bankruptcy because I have already paid for my purchases twice already. By the time this card is paid, I will have paid for them 5 times!

    aveefd 03:17:48 AM Jan 29 2009

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    Advanta is the most EVIL company out there !

    pverderame 07:13:38 AM Jan 22 2009

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    300 MILLION LEAGL CITIZENS IN THE USA INCLUDES ALL MEMEBERS OF A HOUSEHOLD.GIVE EACH HOSE HOLD 200,000 PER MEMEBER OF HOUSEHOLD THAT IS A LEGAL RESIDENT. THAT'S STIMULIS THAT'S ALSO NO WHERE NEAR 700 BILLION!!AIG GOT THE MONYE WHERE IS IT??? THEY CONTROLL THE CONGRESS' PENSION FUND. HHMMM NO ONE IS LOOKING OUT FOR ANYONE BUT THEMSELVES ESP YOUR CONGRESSMAN/WOMEN

    gunwriter 08:28:51 PM Jan 21 2009

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    That's it. BAND TOGETHER. 'WE THE PEOPLE" can make them do whatever we want if we band together. That is how they win: divide and conquer. Republicans and Democrats. Crips and Bloods. Catholic and Protestant.

    miacollin 11:28:49 AM Jan 21 2009

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    look up the history of the Federal Reserve--thats why the banks and credit card companies stay in business and are above the law.

    cemanmadelon 11:26:40 AM Jan 21 2009

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    Why is the government giving them a year to straighten things out? They are not giving the public more than a month notice that they are increasing rates, even though you have not been late or over the limits? concerned.

    maroni78 10:45:07 AM Jan 21 2009

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    my business is caught in the same trap only by a different predator WAMU and First Equity. Went from $10,000 to $49,000 in two years. when my payments were current and more than mimimum I was "rewarded" with higher limits instead of lower interest rates, boy I fought round and round with them on that point. No wI have no more limits and 30% interest because of a few late payments too.

    vectorcr2112 03:21:22 PM Jan 18 2009

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    This whole fiasco was engineered over a long time in order to drive the world to bankruptcy. All the markets are collapsing, every single market you can imagine is having the same trouble. Everybody wants their money and nobody is spending any. After a time of this, people will go along with any plan that seems to make sense. The answer to the problem will be trotted out as a global money system into which every person in the world will have to subscribe to, or do without any sustenance at all. One world government will be the result. Just ask Henry Kissinger what he thinks. If you like that idea, just remember, you didn't get to vote for it.

    cmorse1052 02:02:19 PM Oct 16 2008

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    Yep, I'm that small business owner who developed a product, bought inventory, and saw the gas prices kill the market before I got started. Now i'm in the process of losing my home of 20yrs, deep in debt, and Henry Paulson hasn't called me recently to offer help!!!

    realestate57 02:15:45 AM Oct 16 2008

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    My Advanta card went from 7.99 to 28.I will keep their money for zero interest until august and then pay it off and use Chase. how do they make money????

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