Small businesses turn to credit cards
As banks tighten requirements for loans, many small business owners are relying on credit cards for capital, prompting card providers to offer up special business accounts. Stacey Vanek-Smith reports.
Credit cards (Peter Macdiarmid/Getty Images)
More on Spending, Entrepreneurship
TEXT OF STORY
Bob Moon: You've undoubtedly heard the old saying: You have to spend money to make money. For most entrepreneurs, though, it's more like you have to borrow money to make money.
But just try getting yourself approved for a loan these days. A recent survey from the National Small Business Association found that more than half of small business owners are having trouble borrowing money and as Stacey Vanek-Smith reports from the Marketplace Entrepreneurship Desk, that's creating a business opportunity of a different kind.
Stacey Vanek-Smith: Entrepreneurs may not be able to get credit these days, but they can get credit cards.
The Discover Business Card, the MasterCard Business Card, The American Express Plum Card... business credit cards are growing 27 percent a year, one of the few bright spots in an industry that's been slammed by growing default rates and thrifty consumers.
Robert Manning is the author of "Credit Card Nation."
Robert Manning: Small business loans are becoming a new jewel in the credit card industry. Loans that banks don't want to offer at single digit interest rates they now are offering it through business cards at double digit interest rates.
But many entrepreneurs are so desperate for money they're willing to pay the price.
Ze'ev Feig: The interest rate is not as significant as really getting the capital.
Small business owner Ze'ev Feig runs high end sportswear company Zensah. He says even though he has excellent credit and his company's profits are growing, banks won't lend him money… His capital comes from a stack of plastic.
Feig: Building the Internet site, marketing, paying for trips... All of that came from really the credit cards.
To compete for customers like Feig, card companies are offering more options and perks.
[Business credit card ads:]: ...Small business savings on car rental, automatic...
...5 percent cash back bonus on office supplies...
...Having the option to defer payment for up to 2 months interest free could really help with cash flow when you build new stores...
The Visas and Capitol Ones of the world are offering new services, too, like free consulting and online social networking communities.
Discover Small Business Watch's Sastry Rachakonda says ease and lack of scrutiny are also part of the appeal.
Sastry Rachakonda: Typically, if you need money from a bank, there is an immense amount of documentation that you need and on an ongoing basis if you need $8,000 here and $5,000 there, it's just easier to take it on your business credit card.
But credit card companies could end up taking it on the chin if the declining economy takes a lot of small businesses with it, says industry expert Robert Manning.
Manning: Right now, the credit card industry sees this as a great opportunity to augment their losses, but if the economy continues to recede and if small businesses do take the brunt of it in the short term, the banks will be losing money on the personal credit card side as well as the business side.
It's not a perfect union for small business owners either. Manning says a lot of business credit cards are not subject to interest rate caps, so if a company hits the skids, entrepreneurs could end up paying rates that top 25 percent.
I'm Stacey Vanek-Smith for Marketplace.
Comments
Comment | Refresh
From Long Beach, CA, 06/24/2008
I would like to know from the gentleman by the name of Lee Emery who commented that he knows of securing revenue from a $500 billion dollar industry. Could you please put me in touch with him? Thank you.
From Chicago, IL, 06/20/2008
Thank you Stacey for airing this report. For an entrepeneur to finance their operations based on their credit card is very risky, especially since the credit card company can arbitrarily raise the interest rate. I'd advice these entrepeneurs to seek out alternatives or opportunities that can provide a steady flow of revenue apart from their own business. I personally know of one that takes advantage of a $500 billion dollar industry. What is 1/1000 of $500 billion? $500 million!! I think an entrepeneur can finance his own venture with just a fraction of $500 million and not be in debt doing this. Want to know what this opportunity is? Seek and you shall find because it does exist.
From Vineyard Haven, MA, 06/20/2008
I listened to this story on the radio and heard that some banks are charging upwards of 29%? Well, let me tell you about a certain bank in Salt Lake City, UT, that raised my interest from 16.99% to 34.99% during a single statement period. While I have never been late or missed a payment, my $15,000 balance, (on a $20,000 line of credit) had warranted a "portfolio review" that prompted the increase, according to the account rep I spoke to. She added that there would be no chance to decrease the APR until I paid the balance. Though I'm not sure how the increase in APR would help me to pay the balance, ADVANTA was offering me an APR of 8.9% on the same account on balance transfers. Oh, that makes sense.
From San Diego, CA, 06/19/2008
My small business gets calls everyday offering unsecured lines of credit, credit cards, etc. One recorded call comes in every single day offering ...; I hang up everyday. Very annoying. They must have money to burn up just on marketing to those who obviously are not interested.
Post a Comment: Please be civil, brief and relevant.
Email addresses are never displayed, but they are required to confirm your comments. All comments are moderated. Marketplace reserves the right to edit any comments on this site and to read them on the air if they are extra-interesting. Please read the Comment Guidelines before posting.
You must be 13 or over to submit information to American Public Media. The information entered into this form will not be used to send unsolicited email and will not be sold to a third party. For more information see Terms and Conditions and Privacy Policy.