According to a recent Federal Reserve report on small business credit card usage, though small business financing remains sluggish in the areas of business loans and business lines of credit, small business credit cards are fast becoming a popular, short-term financing option. Isn’t this a bit of deja-vu?
When the government stimulus program dried up in June, the biggest banks quickly responded by refusing to provide small business loans. Instead, they have been pushing credit card accounts on small businesses, claiming that credit card loans are the best thing since sliced bread. Has no one learned anything from the economic crisis?
In 2009, about a fifth of small businesses attempted to obtain a new credit card. Among those small businesses applying for cards in 2009, 80% stated that their most recent request was for a business credit card. In the end, about three-fourths of all applicants were approved for a card. On the other hand, the success rates for small businesses applying for lines of credit or bank loans in 2009 were about one-third and one-half, respectively.
Since credit card terms can change in an instant and lines of credit can disappear overnight, it’s clear that the banks that stand to make a hefty profit from the return to plastic. Credit card loans can be disposed of easily by the banks but place far greater pressure on business owners than standard bank business loans.
Nevertheless, with business financing so hard to come by (even those pesky SBA loans were notoriously hard to obtain), business credit cards used along with alternative methods of financing may be the only way businesses can secure the capital they need in this brave new recessionary world.