The Wall Street Journal
By: Angus Loten
July 28, 2011
But Consumer Protections Are Often Lacking, Spurring Calls for Regulation
More small companies--already struggling with weak sales and tight lending--are being forced to rely on business credit cards to provide working capital.
Many of these cards are subject to unannounced rate changes, unrestricted penalties and other terms that were banned from consumer cards in the wake of the financial crisis.
The situation is prompting lawmakers to renew calls to extend to small businesses the protections that consumers got under the Credit Card Accountability Responsibility and Disclosure Act. That act prevents card issuers from raising rates without notice, applying penalty rates to existing balances and charging over-limit fees that are higher than the amounts owed--all common features on many business cards.
But bankers say their strict terms are necessary to offset the added risks of lending to small firms in a shaky economy. Extending the protections, they say, would force issuers to drop many riskier cardholders, cutting off a key financing source.
More than 80% of the nation's estimated 27 million small businesses use credit cards to provide working capital, the Federal Reserve reported last year, with about 64% using business credit cards, up from well under half a decade ago. Only about a quarter of the small companies that applied for cards were rejected, the report found. By contrast, some 60% of small-business bank-loan applications have been rejected this year, according to a study by Pepperdine University.
Small-business credit-card use dipped last year as the recovery stalled, according to the National Small Business Association, a lobbying group, but it says that survey data it will release next month show that credit-card use by small businesses has inched back up over the past six months. At the same time, the association says, more owners are carrying balances of $10,000 to $25,000 each month, and fewer are carrying less than $10,000.
Chris Ellis, the chief executive of the Cincinnati in-home medical-services company Helping Hands Healthcare, supports extending credit-card protections to small businesses. He says he had nine business credit cards before the financial crisis. Then, without notice, he says, one was cut off, another boosted his interest rate to 29.9% from 15%, and still another cut his credit limit to $10,000 from $30,000, even though he rarely missed a payment.
As a result, Mr. Ellis says, he now relies on just four business credit cards to cover medical-equipment and computer purchases, among other expenses. "I had to start dipping into my personal savings," he says.
Last month, Sens. Jack Reed (D., R.I.), Charles Schumer (D., N.Y.) and other Democrats called on the central bank to require card issuers to clearly disclose that any credit cards intended for businesses aren't covered by CARD Act protections.
In May, Rep. Nita Lowey (D., N.Y.) introduced a bill that would extend the protections to employers with fewer than 50 workers. "Protecting these businesses from unfair and deceptive billing practices by credit-card companies--as we do already for individual consumers--is the least we can do to help small businesses grow, expand and hire," Ms. Lowey said.
But bankers argue that restricting issuers from managing risk will do the opposite. "Small-business credit is different from consumer credit," says Ken Clayton, chief counsel of the American Bankers Association, a Washington-based trade group that represents Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., among other credit-card issuers. He says small businesses tend to borrow on credit cards when they don't qualify for traditional loans. While that access has been beneficial, he says, issuers have to get "repaid for the risks they take on in supporting riskier enterprises" or they will cut those businesses off.
Business cards typically have much higher credit limits than consumer cards--ranging from $10,000 to more than $50,000--but small-business credit-card loss rates are 20% to 30% higher than those for consumers, according to the Federal Reserve.
The risks haven't prevented card issuers from targeting small businesses. A recent study by the Pew Charitable Trust, a Washington research and advocacy group, found that business credit-card offers rose to 4% of all direct-mail credit-card offers by December 2010, up from less than 2% in January 2006, with sharp spikes of 10% to more than 20% between 2008 and 2009.
Over that period, issuers mailed out 44 million business credit-card offers to 12 million U.S. households in an average month, the study found.
Last year, the Federal Reserve reported that over 50% of small businesses receive business-card offers in the mail every month, up from 35% in June 2009.
Nick Bourke, director of the Safe Credit Card Project, an advocacy group that led the Pew study, says the banks' reluctance to extend CARD Act protections to smaller firms comes down to revenue. "People have always paid a lot for credit," he says. "This legislation has made costs more aligned with the market."
Still, a growing number of card issuers are voluntarily adding some of the protections to small-business cards, including Bank of America, Capital One and American Express. Alisson Andrade, a senior analyst at Corporate Insight, a New York-based research firm, says the move is part of a broader marketing effort. "Small-business card issuers are trying to give cardholders more incentive to use them," Ms. Andrade says.
As an alternative, smaller businesses might consider using a regular consumer credit card until protections are in place, says Beverley Harzog, a credit-card analyst on credit.com. "Depending on the size of the business, a consumer card may be a good fit. And they're protected if they get in trouble," she says.
Write to Angus Loten at email@example.com