Guest blog by Daniela Baker of CreditDonkey.com
Small businesses and credit cards have a complicated relationship. Entrepreneurs often turn to small business credit cards to provide capital during the early years. Some entrepreneurs use their personal credit cards to provide the seed capital for their dream. A smart entrepreneur should understand the dynamics behind the relationship.
- Small businesses are being courted aggressively. With upwards of 27 million small businesses, spending a sum total of $5 trillion a year, credit card companies are making a move on small businesses. From free roundtrip tickets to double rewards points for every dollar spent, things are heating up.
- Businesses have received a increase of credit card mailings from 2009, to the tune of 256 percent in the first quarter of 2010. That must make the small businesses feel extremely special. That, or completely inundated with junk mail.
- A corollary of this growth though is that business credit cards don’t get the same protections as individuals. Since January 2010, business credit card rates have skyrocketed – Up more than 30%. The Credit Card Accountability, Responsibility, and Disclosure act limits rate increases and asks banks to mail bills 21 days before the due date… Except these are individual securities and aren’t meant for businesses. Hope those businesses have a back-up plan.
- The fact that small businesses are targets for credit card hikes is no secret. What’s really interesting is that banks are so excited about these rate hikes, they have reportedly started offering business credit cards to people who don’t actually own businesses.
- In a SurePayroll poll a few years back, out of a sample size of small business owners, 29% used their cards to help keep personal and professional expenses separate, 22% used the cards for bookkeeping, 20% highlighted convenience, 18% liked the rewards received, and 10% said it helped with short term cash flow issues.
- Small business credit cards have the ability to actually create jobs, both directly and indirectly. From 2003 to 2008, the small business credit card increase created (according to a report by Keybridge Research) “more than 592,000 small business jobs as well as one million direct or induced jobs throughout the US economy.” The total impact of small business credit card use: 1.6 million jobs.
- It may have one of the longest credit card names in history: The Capitol One Visa Business Platinum Preferred No Hassles Miles Card. How could you go wrong with that? Only the fact that you might have to remember its name every time you called in to check the balance or question certain suspicious charges.
- In the Federal Reserve’s recent Senior Loan Officer Opinion Survey, 75% of banks explain they’ve tightened rates for businesses (up five percent from only three months back). One cardholder’s lifetime fixed rate actually jumped from 2.99 % to 9.99 %. His cash advance rate jumped an astounding 17.85% in the same time period. Businesses can opt out of the rate increases, but they then also have to opt out of their credit card. Talk about a lose-lose situation.
- Maybe the break-up is coming sooner than expected… From the National Small Business Association – In the past year, the number of small businesses relying on business credit cards has dropped from nearly half to just about slightly over one third. In the same time, credit cards have dropped from the list of financing options, from first to third.
Once armed with knowledge, small business owners should still consider credit cards as a financing option. Business credit cards often provide the necessary capital needed for growth. With the Small Business Administration pointing to “impending growth in small business lending”, the future looks bright for entrepreneurs.