For many small businesses, credit cards have become an important means of financing day-to-day operations, particularly in the current tight credit environment. The percentage of small businesses using credit cards to manage cash flow increased from 44 to 59 percent in the four months from December 2008 to April 2009 alone, an almost 33 percent increase.
The sharp increase illustrates just how many small businesses have been forced to turn to credit cards because other sources of funding have dried up. Unfortunately, there are numerous signs that the tightening credit environment is spilling over into business credit cards as well. Here are the key changes to the business credit card landscape and what they mean for small business owners going forward.
Drastically reduced credit lines. According to the New York Times, as much as 75% of small business owners have seen their card limits slashed within the last six months. Unfortunately for many business owners too busy to read the fine print on their credit card statement, the first they know about the reduced credit limit is when the company’s small business card gets denied.
Aggressive interest hikes. Many small businesses have seen their interest rates hiked over the past six months, often to a dizzying 25-30% APR. And while credit cardholders in general can breathe a collective sigh of relief when the new laws regulating interest rate increases goes into effect in August 2010, unfortunately, the changes don’t extend to business credit cards.
This could turn into a double whammy for small business credit cards. Not only are business credit cards left out of the protections against retroactive interest hikes going forward, they are likely to be included in the steps credit card companies will be taking to protect themselves before the new legislation steps into effect in 2010. Card issuers can be expected to step up the efforts to increase card APRs on existing balances before the new laws limit their ability to do so. Although small business credit cards technically won’t be protected against interest rate hikes by the new legislation, expect them to be swept up in the wave of increasing interest rates across the board.
Less Financing Flexibility. For the past several years, credit card companies have been handing out business credit cards with generous credit lines for little more than the asking. In the current environment, however, card issuers are taking a particularly close look at small business cards because of higher-than-average default rates in this segment of the market. According to The Nilson Report, the delinquency rate among small business credit cards is currently more than 12 percent, about two percentage points higher than for consumer credit cards.
As a result, the days where a small business owner could get approved for a business credit card with a $20,000 limit within 30 seconds of applying for it online are over. Expect it to be much more difficult to get approved for a small business credit card going forward, and expect the card to have a lower initial credit limit.
The take home lesson: Despite their ease of use, business credit cards come with too much inherent risk to be relied on as a significant source of financing. This has always been the case, but it will be even more so going forward. With small business credit cards, a business owner will never know for sure how much of a line of credit the business has to rely on, nor what the interest will be because both can change at any moment.
As millions of small business owners across the U.S. are discovering, no one can operate a small business with that kind of uncertainty about what sources of financing will be available and what it will cost. To avoid falling victim to the changes ahead, business owners would be wise to avoid the most common mistakes of credit card usage, while also taking proactive steps to seek other sources of financing.
