Credit Cards Replace Small Biz Loans


The 30% interest rate on their small business credit card shocked James and Heather Hills enough to stop using it entirely in April.

The couple had turned to credit cards in early 2006 to get their Elgin (Ill.) startup, mhn Internet Marketing and PR, off the ground, after three loan officers told them that they wouldn’t qualify for a bank loan without capital equipment to put up as collateral.

So the Hills, who have no outside employees, took out a $50,000 home equity line of credit and two personally guaranteed small business credit cards.

While data on small business borrowing is scattered, indications show that entrepreneurs are increasingly relying on credit cards to finance their businesses, especially early-stage companies.

The percentage of firms using credit cards has jumped from 16% in 1993 to 44% today, according to surveys by the National Small Business Association, a trade group. In the same period, the proportion using bank loans dropped from 45% to 28%.

A Federal Reserve survey showed that the percentage of firms using business credit cards jumped from 34% in 1998 to 48% in 2003. And numbers from the NSBA and the Fed show that between 20% and 30% of all small businesses carry a revolving credit-card balance, rather than paying their bills in full each month.

Over the last decade, credit-card companies have courted small business owners as issuers try to expand beyond the saturated consumer card market. Some 12% of the 6 billion credit-card offers mailed each year promote small business credit cards, according to Mercator Advisory Group, an industry researcher.

That’s 720 million offers, or roughly 26 for each small firm in the U.S. “As issuers have discovered the small business segment, they have become fairly aggressive about getting small business cards into the hands of some very early-stage businesses,” says Mercator analyst Ken Paterson.

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Photo by LotusHead.

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