Small Business Credit Stages Tentative Comeback

Before the recession, small business owners were coveted by credit card issuers as big spenders who churned a lot of money through their cards. The economic woes turned that upside down: Card issuers quickly turned off the credit spigot to this suddenly risky group and slowed credit card offerings to small business customers to a trickle.

Until recently.

With the economy in fragile recovery, card issuers are cautiously adding back offers for small business credit cards.

Small business credit cards had disappeared from online marketing channels, but now they're back. And Mintel Comperemedia, a company that tracks credit card offerings by mail, reported a slight uptick in the first quarter of 2010. Its panel of 1,200 small business owners received, on average, 2.8 mail offers of new credit cards in the mail. That's up from 2.3 offers in the fourth quarter of 2009.

Cautious optimism"We're taking a cautiously more optimistic view," says Andrew Davidson, senior vice president of Mintel Comperemedia. "As we see more positive information on unemployment and defaults, we'll see (the availability of credit) spread."

The return of the small business credit card isn't a surprise, but the reason behind it is.

With the enactment of the Credit CARD Act of 2009, industry watchers thought they would see a rush to the small business market. That set of regulations mandated new disclosures and limited or banned highly profitable practices for consumer credit cards, such as over-the-limit fees and double-cycle billing. However, the rules don't apply to small business cards, meaning card issuers remain free to operate as they did before and apply those lucrative practices to business owners.

It didn't happen.

"We thought as soon as CARD was announced, we'd get this whole flurry of small business offers being mailed out," says Anuj Shahani, director of Synovate's competitive tracking service. "It didn't hold true."

Instead, there has been a slow return to the small business card market, for a more basic reason. The economy appears to be getting better.

"There's no data to support that it's because of the CARD Act," says Red Gillen, senior analyst at Celent, a financial services research firm. "The economy is a bigger issue. Let's say the CARD Act passed, but the economy was still tanking. Would banks be offering credit to small businesses? I don't think so. What's different? The economy is better."

Mike Nagle, general manager of the Ink credit card from Chase, says there's a much more basic reason for card issuers to bump up their efforts to woo small business owners -- money.

'A great opportunity'"We see a great opportunity," he says. "It's a large market. There are 27 million small businesses with up to $5 trillion a year in spending. The majority of that spending still happens on a check. There's a great opportunity to provide innovation."

The opportunity definitely is there. Small business owners have a long history of turning to credit cards to start their companies and keep them running. According to the Federal Reserve, 83 percent of U.S. small businesses used business and personal credit cards in 2009. American Express alone processes $1.6 billion worth of transactions from business owners every week, AmEx spokesman Tom Sclafani says.

It makes sense. Used properly, they're a convenient way to pay for everything from raw materials to travel for sales calls. They help with managing cash flow -- they're essentially a short-term loan -- and provide a handy record of spending on a monthly and annual basis.

Fed report sheds light, draws few conclusionsWith the enactment of the CARD Act, Congress asked the Federal Reserve for a report on how similar regulations would impact small business credit cards. That report, issued in May 2010, shared a wealth of information on small business credit card usage, such as:

They usually have higher credit limits than consumer cards.
They are more expensive for credit card companies to issue and service than consumer cards.
The losses for business cards run 20 percent to 30 percent higher than with consumer cards.
Most small business owners use credit cards, but only a small percentage (18 percent) carry a balance. By contrast, about four in 10 households carry a balance on a consumer card.
About 20 percent of small business owners tried to get a credit card in 2009; four out of five of them sought a business (as opposed to a personal) credit card. Of those, about three-fourths were approved. By comparison, about a third of small business owners tried to get a line of credit or a loan at a bank; half of them were successful.

After doing extensive interviews and surveys with small business trade associations, card issuers and credit reporting agencies, the Federal Reserve concluded that business owners would benefit from having the same types of protection that consumers have under the CARD Act. However, the Fed said it's not apparent that the benefits of extending the CARD Act to small business "outweigh the potential risk of increased cost and reduced credit card availability for small businesses."

American Express spokesman Tom Sclafani says that the Fed report validates what it has always seen: The credit needs of business owners are unique.

"When you think about how much a business owner could spend in a given month versus consumers, it's very different," he says. "Their income may be less predictable. Business owners who fall into that category might need to extend their payments longer. They need greater flexibility. We've said extending the CARD act to small business would have unexpected consequences. What we saw in the report from the Fed felt like it validated what we'd said about how business owners use cards differently."

Bill Dunkelberg, chief economist for the National Federation of Independent Business, says that business owners don't need quite as much hand holding as consumers. They recognize the value of the service and understand the risk involved in providing it.

"It's a reasonable assumption that people in business are more business-savvy," he says. "It's good to have some rules about disclosure. It makes it hard for people to be misled. On the other hand, the harder you make it, the less credit will be granted. There's a trade-off. Who's to say where that line is?"

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