Yes, I’ve read them. The stories are everywhere. The economy is struggling and so are small businesses. Perhaps The Great Recession is over but the economy is soft to say the least. Bank loans are tough to come by. Non-bank finance lending is way down – actually they are at their lowest levels since 1998 as Scott Shane reported here.
In fact, right now there is a lot of talk about Dr. Doom’s “perfect storm scenario” that Nouriel Roubini says is beginning to play out. Months ago, Roubini talked about the combination of stalling U.S. growth, debt troubles in Europe, the slowdown in several emerging markets (led by China), and military conflict in Iran causing a “perfect storm” that would impact the global economy.
The recent reports of softer than expected job growth in the U.S. and the inflation report from China are fueling speculation that Roubini may once again be onto something.
We also know how important it is for small business owners to be able to access loans and lines of credit as they start, build, and grow their businesses. Studies have shown that small business owners are hesitant to do things like hire additional employees and increase benefits to their employees when they cannot access capital. They go into “survival” mode and do not expand and grow because the risk is too great.
According to the Keybridge Research study, the impact of credit card usage and specifically business credit cards on small business growth is very real and quantifiable. According to this study they found that for every $1,000 of credit card use for small business owners there is an average of $5,500 in increased firm revenue. Additionally, from the years 2003 to 2008, they estimate that the expansion of credit card lending in the U.S. contributed to the creation of 1.6 million U.S. jobs.
Don’t underestimate the impact of these numbers – credit card borrowing is by far the #1 source of financing for small business owners.
According to the National Federation of Independent Business, 79% of small business owners use credit cards to run their business. It’s actually down from 2008 when that number was 85%. So it’s not only true that credit cards are a vital part of the overall funding strategy for small business owners, but in some cases, it’s the only form of credit they really have.
That’s why the recent news about credit card delinquencies is a bright spot in an otherwise dim economic forecast for small business owners. According to a recent Reuters report, credit card delinquencies are down significantly – to the tune of being at low’s we haven’t seen in over 20 years. This is surprising since it’s previously been believed that there was a correlation between unemployment and credit card delinquencies.
Despite the unemployment numbers still not being very encouraging, the percentage of credit card delinquencies has continued to get lower and lower. Unemployment was at 10.0% at its recession-peak in October 2009. Through the first 6 months of 2012 the rate has bounced back and forth between 8.1% – 8.3% so no real progress this year.
So what does all of this mean? Well, I agree with the concerns shared by most about the state of small business today. There are concerns galore. However, with credit cards, we’re talking about the #1 form of financing that is used by nearly 4 out of 5 small business owners.
The banks are back to making nice profits in their credit card divisions and the write-offs are at historic lows so you’re going to see some slight adjustments made by lenders to extend more credit. But here’s the key – they are going to do it to the “credit-worthy” consumers and small business owners.
Unfortunately the CARD Act has hurt small business owners so keep in mind that lenders are beginning to slowly get more generous with their credit lines on credit cards but you’ll still continue to see higher rates after the 0% introductory offers end. Most of the people who seem to defend the CARD Act were the people who lobbied and pushed for it in the first place but here’s a good article from Forbes for those of you who aren’t clear on it’s negative impacts.
Fundamentally, the CARD Act brought regulation at a time when the market and our economy needed liquidity, the equivalent of going on a pasta diet when you need to reduce carbs!
Credit cards are a great financing tool for small business owners and sometimes it’s actually their only option. I realize there’s an army of people out there who don’t like credit cards and that’s okay but they are like anything else – they can be used the right way or the wrong way as you build your business.
Where else can you find low-cost financing (0% intro offers are as good as it get’s and there are millions who have maintained very reasonable interest rates on their credit cards despite what CARD Act proponents may claim), not need collateral, have quite reasonable monthly payments, along with flexibility of monthly payments that is invaluable to a small business owner who is managing cash flow?
We don’t have time here to talk about the involved process of choosing the correct small business credit card but it’s clear that the prospect of some very slight loosening of the underwriting criteria has already happened in the credit card space and with the state of the overall economy let’s celebrate a small victory that will have a very positive ripple effect for small businesses everywhere!
Perfect Storm Photo via Shutterstock
Jon Smith
I had no idea that credit cards were used by small businesses to such an extent! Surely the high interest rates make them inefficient?
Tom Gazaway
Hey Jon, thanks for your comments but I can’t help but respond by asking why you would assume that the rates are high? Two things on that topic. One, I have several credit cards that I’ve obtained in the last few years (since after the credit crisis hit) and I got 0% intro offers on every single one for 6-15 months. Then those rates are between 3.95% and 12.99% – some are on extended promotional plans but most are not. Secondly, we did a case study for people who actually manage their credit cards correctly and looked at the blended rate that they are paying on their credit cards across all balances and incorporating all interest rates. The case studies came back with rates between 5-9%.
I agree that if you make your payments late and/or go over the credit limit then you could likely get put into penalty pricing and have high rates. I also agree that rates are clearly not as low now as they were before the CARD Act but keep in mind that there’s an army of people out there who maintain very low interest rates through proper credit card usage. The media, however, loves to tell the story of the victim and give attention to the times when injustices occur or when something isn’t “fair.”
The last thing I’ll remind you of is that cash flow is king. In other words, most small biz owners will take a higher rate when the monthly payment is reasonable. Remember that “most” of the time your monthly payment on your credit card isn’t tied to your interest rate directly. In other words, it’s very common for an interest rate to go up or down but your credit card payment stays the same or almost the same. Of course there are exceptions to every rule but if you’re a normal small biz owner where cash flow is tight would you rather have an int rate of 6% with a monthly payment of $2000 or a rate of 10% with a monthly minimum payment of $450? I know that doesn’t make sense when you look at the “cost” over time if cash-flow is not king but we say cash flow is king but then constantly forget that when we obtain financing for our businesses!
Thanks Jon!
Paul
I know the struggle. After law school, I have tried opening my own business but my credit doesn’t allow for a credit card. If only I could get one, there are so many marketing efforts I could make but can’t. Great article.
Tom Gazaway
Thanks for your comments Paul. There’s other ways to skin the cat but I understand your frustration. There are lots of resources out there so that credit doesn’t have to stand in your way. Let me know if you have any other questions or concerns.