The Credit Predicament: What’s a Small Business to do?

December 9th, 2008

Despite the Treasury Department’s efforts to unfreeze credit by directing billions of dollars to banks, it seems credit is as tight as ever, and small businesses are still finding it hard to get affordable loans. And if this isn’t troublesome enough, banks are simultaneously cutting existing lines of credit and raising interest rates on credit cards, even in the case of small business owners with good credit scores. As a result, many are calling for further government intervention and regulation of banking practices to solve this credit predicament.

For one thing, many small business owners are wondering why more SBA (Small Business Administration) guaranteed loans aren’t being offered by banks these days, and this question was recently addressed in a New York Times article by Joe Nocera who shared an anonymous banker’s explanation. The banker explained that while a bank may have the option to offer SBA backed loans to applicants, the SBA can’t force the bank to make these loans. So why wouldn’t a bank chose to make a loan that is SBA guaranteed from 50 to 90 percent? According to the anonymous banker, it’s like this: “First, S.B.A. loans are held on the books of the banks. They may be securitized later, but in today’s market that is close to impossible to accomplish….and banks are making between 2.25 percent and 5.5 percent more on their own loans than on those booked as S.B.A. loans. And when the banks are in a capital crisis, they will direct funds to the products that give them a better return. Additionally, S.B.A. loan fees do not get paid to the bank, but go directly to the S.B.A.”

So what’s to be done about this? The anonymous banker recommends government intervention and suggests that the Treasury Department only provide capital to banks who agree to use a significant portion of the funds for SBA loans. And the anonymous banker is not the only one calling for more government regulation of banking practices. Many small business owners are insisting that the government also intervene in the case of credit card policy.

In today’s credit card industry, it seems a card company can change the terms of an account for virtually any reason, and banks are hiking interest rates and reducing credit limits left and right these days, even in the case of small business owners with good credit histories. According to a recent article by Carrie Teegardin for the Atlanta Journal-Constitution, credit card companies are using any excuse to increase rates and change terms. A late payment on any other loan, a drop in a credit score, the lowering of a credit limit by another lender, or anything that infers greater risk can lead to rate hikes and reduced limits. Additionally, they are applying new raised rates to old balances, as well as to future charges, and small business owners are suddenly being faced with much higher monthly fees. According to the article, the Federal Reserve Board has indicated a willingness to consider new rules that would include a ban on increasing the APR on a customer’s account balance unless a payment is more than 30 days overdue. It is anticipated that final action on any proposed rules will come by the end of this year.

In the meanwhile, what’s a small business to do?

1. Negotiate With Your Credit Card Company: You may benefit by negotiating with your company over fees, limits, and rates. This is especially true if you already have a good credit score. It could be worth your while to ask your company to drop your annual fee, for example, waive a late payment fee, or reduce rates or increase credit limits. People with good scores may be able to talk a bank into rescinding a rate increase or increasing a credit limit by threatening to take their business elsewhere. You might also improve your credit score if you can get your credit card company to raise your limit periodically. If you don’t increase your spending at the same time, a higher limit will increase your available balance which positively impacts your credit score.
2. Shop for the Best Business Credit Card for Your Business: If you need a new line of credit, or are unhappy with the terms of your existing card, you can shop around for a new business credit card; there are plenty of options. Compare cards and apply for the card that best meets the needs of your business on sites like SmallOfficeCredit.com.
3. Know, Protect, and Improve Your Credit Score: It is important to know your credit score to know what terms to expect when shopping for a business credit card. You will also need to know your score to understand what leverage you have if you ever choose to negotiate terms with a credit card company. And it is more important than ever to build and maintain a good credit score these days; information on improving credit scores can be found in the news and advice section of SmallOfficeCredit.com.
4. Consider Microlenders: According to Colleen Debaise, Small Business Editor for SmartMoney.com, a microlender ( a non-profit that is generally funded by charitable institutions or government grants) may be a good source of funding. Microlenders usually lend smaller amounts of around $5,000 to $25,000, and may also offer some financial training.
5. Consider a Barter Exchange: A barter exchange is an organization that acts as a third party record keeper between clients who wish to exchange goods or services, instead of money, which can be helpful when cash flow is problematic. The internet has become a new medium for barter exchanges, and business owners can find many barter exchanges online these days.
6. Consider Peer-to-Peer Loans: On a peer-to-peer network a business owner can create an online profile discussing their business and how much money they need, and people with money to lend can examine these profiles and decide who they want to lend it to, according to Debaise. This type of loan will not help your business credit, however.
7. Consider Merchant Cash Advances: DeBaise says this is a good option for business owners who do a lot in credit card sales. Factoring companies can loan a business the cash they need right away, and the business can pay the company back from a portion of credit card sales for several months. Business owners must consider this option carefully, however, because interest rates on these advances can be very high.
8. Consider Credit Unions: Credit unions operate like banks, but on a smaller scale, and Debaise says, “They’re really trying to tap into the small business market.”
9. Consider Private Lenders: Some non-bank companies are willing to loan money to small businesses and may look at different criteria than a bank.