A House of Cards: Small Business Depends on Credit
Hurt by bad loans made to home buyers with shaky credit histories this decade, banks have tightened their lending standards and are eliminating risk by slashing credit lines. According to a Houston Chronicle article by Loren Steffy, one Houston business owner reported losing a $50,000 line of credit last month and received a letter from American Express saying it had discontinued its entire small-business credit program nationwide. Small businesses often depend on credit lines such as American Express to meet their capital needs, especially in this economic climate.
TARP funds that were supposed to get banks lending again have not made a difference because the government has not put conditions on the bailout money, requiring banks to use it to extend more credit. According to Steffy, a first audit of the TARP program released by the Government Accountability Office found that the government had no way to ensure the program was working and lacked oversight of how banks were using the funds.
A recent Discover Small Business Watch Study showed 40% of small business owners have experienced cash flow problems over the last 90 days, and although banks are reluctant to offer small businesses traditional loans, many continue to offer business credit cards. In a NSBA (National Small Business Association) survey this year, 44% of small business owners said they used credit cards to meet their needs.
Business credit cards differ from personal credit cards in that some offer more attractive benefits, such as product discounts, extended payment terms, lower interest rates, and higher spending limits, but they also differ from traditional fixed rate loans in that their terms may not stay constant. In fact, according to the NSBA survey, 57% of business owners reported their terms had worsened over the last year, and increasingly there have been reports from small business owners about this growing problem. This is a problem that is affecting anybody, regardless of their credit history, and even small business owners with stellar credit histories are seeing their rates raised and lines of credit reduced or eliminated. In this country we will have to wait until next year to see if new legislation will be passed to more closely regulate the credit card industry and prevent banks from changing terms in a way that adversely effects so many small business owners. The good news in the meanwhile is that with just a little effort, you might be able to get a better deal.
- Negotiate with your bank: Play up your loyalty and history with your bank and threaten to take your business elsewhere. Be equipped with your FICO score to know how much leverage you have with your bank.
- Find out which cards have better terms than your current card: Go to an online business credit card comparison site such as SmallOfficeCredit.com to compare rates and other terms. Pay attention to details such as the length of the grace period and introductory rate, and whether rates apply to balance transfers.
- Arrange for a balance transfer to a new card with lower rates. Be sure you understand the contract to ensure the rate is applicable to balance transfers, not just new purchases.
