Credit Cards on the Rise with Small Businesses

How to choose a business credit cardOver at Small Biz Numbers I stumbled on a good BusinessWeek article about startup businesses using credit cards to finance their businesses in the early days. It points out the growth in business credit cards in recent years:

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.

It’s the dirty little secret of small business here in the United States: many of us use plastic to finance our businesses until they get to a certain size. Credit cards are easy, convenient and sometimes the only credit option available. Credit cards do not require collateral, so startups and very small businesses, especially service businesses, can more easily qualify than they could for a loan. While there’s a lot of talk about Small Business Administration (SBA) loans, the reality is that few startups get them.

This slideshow shows there are at least 14 business credit card providers.

Last year I wrote an article over at the Online Merchant Network about how to choose a business credit card (so you don’t have to rely on a personal credit card).

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Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

12 Reactions
  1. Thank you for the mention, Anita. 🙂

  2. Egad, one those cards charges 30%!!! :0

  3. That’s the downside to credit cards . . . theres a hefty price to pay 🙂

  4. That’s how they get ya! It’s so easy and convenient to just get online and apply for credit cards with no fuss, without even leaving the comfort of your own home. You’re so happy to get the instant credit that you don’t consider the interest rates and payment terms. Then by the time you realize, it’s too late. I’m afraid this will become our next “crisis”. How long til the credit card companies come looking for their bailout?

  5. “How long til the credit card companies come looking for their bailout?”

    I’ve been wondering about that myself. This is all a domino effect.

  6. Yes, Amanda. I’m afraid soon it will be our next crisis too. But still hoping it won’t though.

  7. Our company has only a regular bank card without a credit line. But I have used my own personal credit card in order to pay for a consultation service that turned out to be swindle. I am now stuck in paying back a small amount every month. I have a learned an expensive lesson for the future. I got the card after my studies in New Hampshire. It was a MBNA issued card that sponsored my school with every purchase in some form. It later on become part of Bank of America. During my work in Ohio later on, I got an American Express credit card that helped to pay for things that I needed when I decorated my apartment at the beginning of my residence. Personally, I am impressed by BB&T services and the leadership of the company. Please read my post (Branch Banking and Trust Co) on this company if you are interested. Click on “Martin Lindeskog” Says link.

  8. It’s unfortunate that small businesses feel forced into borrowing at such a high price. It’s even worse to see that when a small business fails they are typically left with a large amount of debt.

  9. @ Babylonsisterz, yes, at that kind of interest rate it won’t be long before your debt is double the original amount — if you don’t watch out. In fact, using the Rule of 72 as a quick and dirty measure, if you didn’t pay it off you’d owe double the money in about 2 and a half years (assumes no other penalties or charges assessed).

    Tip: if you have to use a card with that kind of rate, you’d better be able to pay off your balance each month in a timely fashion.

    @ Sarah, credit cards can be a good thing and help a business grow, if used responsibly. But, I can feel your concern. Everyone should be concerned about getting in over their head and finding themselves in debt instead of making money – ugh!

    Tip: if you understand your numbers (your P & L) and think long and hard before every expenditure, you will be more in command of your destiny on such matters.

  10. Thanks for picking this story up, Anita. We reported this in August, but anecdotally since the financial meltdown I’ve heard more stories of small business who turn to credit cards when they can’t get traditional financing. The terms of credit card loans may be getting worse as well. The couple featured in the beginning of the story, who were paying 30 percent, emailed me a few weeks ago to say their rate went up again, to 35 percent.

  11. Hi John, Yes, I think if the economy declines we will see more reliance on credit cards. Biz owners will use them to tide us over until that big check comes in or we can bill for that big project, etc.

    That’s too bad about that couple’s rate. Another thing I’m hearing is that credit limits are being cut back, as the credit card issuers try to shore up their own financial positions. That’s something we’ll all have to watch out for, too.

    Listen, I think it points out the old mantra: all things in moderation. And that includes credit cards.

    Like I said to another reader, credit cards can be a good thing, so I don’t want to paint them negatively across the board. It’s important to manage your credit extension carefully and intelligently. If you do that, credit cards can play a key helpful role in temporarily smoothing out cash flow dips. I know that I would not want to be without my credit cards — I value having them.

    So don’t be scared off. Just be smart.


  12. I think it’s a mistake to use a credit card for capital on a small business start up.

    Revolving credit accounts can easily get out of hand if not handled properly.

    i.e. keep running up debt instead of paying down the principle as the interest kills you.

    With a bank loan it has set payments, usually is secured with some form of collateral, and has a minimum set time when the loan will be paid off.

    What are your thoughts?