Tight Times Boost Business Credit Cards

by Mercator Advisory Group 0

Scrutiny is again turning to small business credit cards, and their exclusion from the protections of the CARD Act. Part of the increased attention is due to the importance of business cards to small businesses as a source of working capital.

More than 80% of the nation’s estimated 27 million small businesses use credit cards to provide working capital, the Federal Reserve reported last year, with about 64% using business credit cards, up from well under half a decade ago. Only about a quarter of the small companies that applied for cards were rejected, the report found. By contrast, some 60% of small-business bank-loan applications have been rejected this year, according to a study by Pepperdine University.

Small-business credit-card use dipped last year as the recovery stalled, according to the National Small Business Association, a lobbying group, but it says that survey data it will release next month show that credit-card use by small businesses has inched back up over the past six months. At the same time, the association says, more owners are carrying balances of $10,000 to $25,000 each month, and fewer are carrying less than $10,000.

Legislators are again looking at adding CARD Act-like protections to business cards:

Last month, Sens. Jack Reed (D., R.I.), Charles Schumer (D., N.Y.) and other Democrats called on the central bank to require card issuers to clearly disclose that any credit cards intended for businesses aren’t covered by CARD Act protections.

In May, Rep. Nita Lowey (D., N.Y.) introduced a bill that would extend the protections to employers with fewer than 50 workers. “Protecting these businesses from unfair and deceptive billing practices by credit-card companies—as we do already for individual consumers—is the least we can do to help small businesses grow, expand and hire,” Ms. Lowey said.

Business cards have in part been excluded from added regulation because of their different risk profile, and broad concerns that regulation could reduce the flow of critical credit to the small business segment. A post-CARD Act study by the GAO mentioned these and other rationales for avoiding added regulation. Card issuers such as American Express, Bank of America, and Capital One have voluntarily included some CARD Act provisions in their products.

In late 2010, scrutiny also flared when it was alleged that issuers were targeting business products to consumers as a way of avoiding CARD Act constraints.

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