Small Companies Increasingly Turning to Plastic

The nation’s entrepreneurs accessed more than $126.8 billion in “micro” loans from banks and thrifts last year, with a growing percentage of it in the form of costly credit card debt, according to a report to be released today by the Small Business Administration.

Small-business owners using credit cards to finance their enterprises is nothing new. But federal officials are growing concerned that the use of so-called business credit cards is supplanting traditional bank loans for amounts under $100,000.

Officials say the growth in credit card loans is a convergence of entrepreneurs’ perpetual need for quick and easy access to capital, banks looking for new markets for their credit cards and traditional financial institutions tightening up standards on small loans.

“For banks, the profitability of these loans is high, so what you see is the numbers shifting to business credit cards, and most of those are by larger banks,” said Charles C. Ou, a senior economist with the SBA’s office of advocacy and author of the lending report.

And though credit cards may provide a short-term cash infusion, experts caution that using credit card debt in place of a loan can ultimately hamper efforts to get more traditional bank financing and also can carry a hefty price tag.

“After the saturation of the consumer credit market, now banks are pushing these [business] credit cards, and those can be higher-cost loans,” Ou said.

In researching loan patterns, Ou identified 16 large banks in 2000 that he classified as “credit card banks,” that is, banks with a high ratio of credit card loans to total assets and with a large number of outstanding loans of less than $100,000 and averaging less than $3,000. Last year the number of these credit card banks grew to 21, including major credit card issuers such as MBNA Corp., Providian Financial Corp. and Advanta Corp.

At the same time, the rate of growth of micro loans at non-credit card banks was flat, and the number of small loans at the so-called credit card banks grew by nearly 20%, the report said.

Interest rates on business credit cards often range up to 20%. By comparison, the typical micro loan in a program funded by the SBA has rates in the 11% range, said Jody Raskind of the SBA’s office of financial assistance. In that agency’s micro-lending program, owners can access up to $35,000, to be paid within six years.

Though some business cards, such as American Express’ Blue card and Fleet’s Platinum Visa Business Credit Card, start with a low introductory rate, they often jump after six months to rates of 12% or more.

Much less profitable, said experts in small-business financing, are traditional loans in small amounts.

“A credit card is low administration and high return for a bank,” said David Banfield, president of the Toronto-based Interface Financial Group, which offers invoice financing to small businesses. “They couldn’t give you the same amount of money as a loan, because the administration of it would kill them. They would have to monitor that loan, report on that loan [to the government] and do a whole lot of policing.

“In policing and paperwork, it costs the bank the same to make a $300,000 loan as a $30,000,” Banfield said. “But they can’t make any money on the $30,000 loan.”

For small-business owners, these business credit cards can offer organization: Business cards often send detailed, itemized statements at year end that can be helpful at tax time. Others, such as Bay Area businessman John Blount, are seeking a relatively hassle-free way to access cash.

After racking up more than $15,000 worth of business-related debt on a personal credit card, Blount, owner of La Raccolta, an Italian import shop with outlets in San Francisco and Mill Valley, opted for a business credit card, which he strives to pay down every month.

After taking out home equity loans in the past, he said he was not eager to go through the application process again for a micro-loan.

“We have been looking into getting loans and they ask you to do a ton of paperwork and then we go through that and get rejected,” said Blount, who runs his business with his wife. “This was no questions asked.”

Banfield noted that keeping the credit card constantly maxed out may hamper efforts to get a more traditional loan in the future, because “bankers like ... to see movement” on the loan balance.

To the extent that credit cards provide small entrepreneurs access to capital “they have to help on some level,” said Charles H. DeBow III, special projects director with the Washington-based National Black Chamber of Commerce.

But he cautioned that getting a credit card “doesn’t give you a relationship with a bank.” His organization has helped provide more than $42 million in small, SBA-backed loans last year and is working to create a program to provide “mini-micro” loans of up to $5,000 to start-ups.

Even with such lending programs--there are about 430 micro-lending programs nationwide--entrepreneurs probably will continue to turn to plastic for a quick cash infusion.

“I’m not incurring any debt with the [business] card because I pay it off every month,” Blount said. “And it seemed a lot easier to get this card, with 3.9% interest, than try for another loan. And anything that makes life easier, I’m happier.”