Small businesses relying more on credit cards

Credit Cards

To get the funding they need, small businesses must rely on the only credit left. Image from Wikimedia Commons.

Contrary to popular belief, there is still credit for small businesses to obtain. Unfortunately, the credit they can obtain isn’t in the form of a business loan from a bank or the Small Business Administration as much anymore.  These days, more small businesses are having to rely on credit cards.  A lot of funding that used to be readily available for small businesses just isn’t there anymore, and unless you’re running a Fortune 500 company, it’s hard to get the help you need.

Small business credit cards booming

According to CNN Money, more small business owners are having to rely on their credit cards to get the funding they need.  Many who request business loans are getting denied, but getting approved instead for a credit card.  The first quarter of 2010 saw a reduction of $40 billion in lending to small businesses, which is the lowest level since 2008.   Less than half of small businesses looking for funding in 2009 were actually able to secure a loan of any sort, and as of June of this year, the portion of the stimulus package that was dedicated to small business lending lapsed into oblivion.

What is in the way?

The normal way a small business gets a loan to get off the ground, or help them expand, is through either a small or mid-size bank.  There is also the Small Business Administration.  However, smaller banks do not have as much liquidity as they used to, and the SBA stimulus funding has run dry.  When a business owner applies for a loan, to buy equipment or start a company, they can pledge certain things as collateral, like property.  Since property isn’t as valuable anymore, less credit is going to be made available. They are forced then to rely on the one source of credit that’s readily available, which is credit cards.  If a piece of property isn’t as valuable anymore, it’s hard for a business to get mortgage loan modification to free up cash.

Someone is reaping all the benefits

An installment loan from the SBA includes a minimum term of seven years.   Credit cards, on the other hand, can take forever to pay off if one gets locked into making only minimum payments.  The difference between the credit card that John or Jane Q. Public has and a business owner has is that a business credit card is not covered by the CARD Act.  The main source of funding for credit cards is the biggest banks.  Bank of America, JP Morgan Chase, Citibank and Wells Fargo all lend huge amounts of money on credit cards.   Wait a moment; who was it that got the most bailout funds again?

Further Reading

CNN Money

NY Times piece about SBA loans