October 22, 2014

Credit Card Companies Woo Small Businesses—But Will Entrepreneurs Say Yes?

What financing methods have you been using to grow your business and keep cash flowing during the recession? As the economy improves again, credit card issuers are hoping more small business owners will turn to credit cards as a cash management tool.

The Los Angeles Times recently reported that entrepreneurs can expect to see more credit card offers in their mailboxes in the coming months. Why? Because the 2009 legislation that reformed credit card policies put a lot of restrictions on the kinds of rates and penalties card issuers can charge consumers. Business credit cards, however, were excluded from many of these protections. That means card issuers can charge us higher interest rates and make a bigger profit.

But while card issuers are hoping to attract more small business owners, entrepreneurs are a bit gun-shy about taking on new credit cards. There are several reasons for this. First, business credit card rates rose faster than rates for other types of cards in 2010, according to data from IndexCreditCards.com. Second, the rates can increase drastically if a business owner makes a late payment. And unlike consumers, business cardholders aren’t eligible for relief from penalty rates if they make future payments on time. That means one late payment can lead to a permanent increase.

Credit Card Companies Woo Small Businesses

Adding to the problem, card issuers, on their end, have been burned by small businesses that failed or couldn’t pay their balances, and now have tighter qualifications for issuing credit cards in the first place. This means even some business owners who want new business credit cards can’t get them.

These factors have made it harder for small business owners to use credit cards as they traditionally have: as a startup financing or expansion tool. Charging a sizable amount, then paying it off slowly, is too risky now. Instead, business owners the Times spoke to generally pay off their cards in full each month.  While this offers convenience (credit cards are still a great cash management tool), it limits your ability to use the card for financing substantial investments in the business.

As a result, while credit card companies may be wooing small businesses, the use of credit cards by small business owners is declining. According to the National Small Business Association, nearly half of all small businesses used to rely on credit cards for financing, but in the past year, that percentage has declined to just over one-third. In the same time period, credit cards have dropped from first to third place on the list of most commonly used sources of small business financing.

Does that sound right to you? Are you using cards more or less in your business? If you get an offer for a new card, are you likely to jump at it…or toss it in the circular file?

7 Comments ▼

Rieva Lesonsky


Rieva Lesonsky Rieva Lesonsky is a staff writer for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Follow her on Google+ and visit her blog, SmallBizDaily, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.

7 Reactions

  1. It’s somewhat of a paradox. Credit card companies want to woo more established companies/business owners because they are more likely to pay. However, these are the same companies and people that don’t need credit cards or are smart enough to realize the significant risk posed by carrying debt on high interest credit cards.

    I’m personally not a fan of credit cards, so I congratulate those that keep their finances in such a way that they don’t need them.

  2. Rieva,

    Business credit cards have been my lifeline during the last year or so.

    It’s great to have them, for sure.

    They make paying bills a lot easier.

    Now, to pay them off,however…

    The Franchise King®

  3. Hi Rieva,

    Credit cards have always had a risky element to them and with the new set of rules of raised rates on late payments will definitely make business owners think 10 times before opting for this card. Though I feel credit cards are helpful, one should avoid using them as much as possible to manage money more effectively.

    Riya Sam
    Training for Entrepreneurs.com

  4. Great article, Rieva! I have to agree on all points considering that I am one of the entrepreneurs that has moved to an all-cash books. I pay everything by check or cash and even provide an incentive discount to my clients (3%) if they pay by the same methods. It’s amazing how many of my clients became excited about this new discount and jumped on it right away.

    So long credit cards. I’d say it was fun to do business with you in the past but I’d be lying!

  5. What we’re seeing at PEX Card is that companies are making more concerted efforts to use cash-based financial operating methods because: (a) the choices available in the credit card market offer availability but are too expensive for simple purchases like gas and travel and, (b) while access to bank credit lines is limited, the reasons to borrow in the first place – i.e. expansion, updating equipment – are hampered by the economy.

    From a day-to-day spending perspective, credit cards do not make sense. Small business credit cards require that the owner or principals guarantee the line and many owners simply don’t feel comfortable with that.

    As the benefits of credit card diminish in a small business setting and are used more like cash cards anyway – the question becomes, why use them?

  6. More evidence that big business and big politics are all in bed with each other and aggressively and intently against small business.

    Why would business cards be exempted from the regulations put in place to protect individuals? Because small businesses use them and big businesses don’t, and anything big business can do to create an even less level playing field and make it harder for small business to do business, the more the bigs think they will “win”. And the fact that big politicians exempted the very tool that most small businesses use to start and build a startup tells you everything you need to know about their allegiance to big business and their summary disregard for small business.

    Big biz and big govt. have no interest in helping small business – they just want us to create jobs to make them look good. Same song, different verse.

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