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Did the CARD Act Really Cause a Decline in Business Lending?

Credit Cards
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The Credit CARD Act, effective since February 2010, attempted to curb fees associated with personal credit cards and restricted questionable banking practices, such as arbitrary interest rate hikes and a lack of transparency in financial statements. However, a bill calling for similar protections on business credit cards failed to pass through Congress. The effects of the CARD Act are still unknown due to its recent introduction, but one trend is for certain: personal credit cards have become more popular in recent years.

Businessweek argues that the CARD Act is responsible for business owners shifting to personal rather than business credit cards, which in turn caused a decline in small business loans. It’s clear that business loans have fallen, but is this shift away from business cards responsible? Hardly.

A Shift in Card Preference

Over the past two years, the number of small business owners using personal credit cards increased by 7%, while the number using business credit cards decreased by 5%. While the cards share many similarities, only the personal card is covered by the CARD Act. A personal cardholder is guaranteed better protection, such as stable interest rates for the first year.

Small business owners may be opting to use personal cards for business expenses to dodge interest rate hikes and other fees not covered by the CARD Act. Most small business owners, whether using a personal or business card, do not carry a balance, indicating that they use the cards for transaction ease rather than capital. Only 28% of small business owners use their cards for borrowing.

A 2012 NFIB report shows that when a small business owner charges business expenses to a personal credit card, not only are two-thirds of those expenses paid in full, but also the majority of overdue payments are under $500. This implies that these overdue loans are not justifiable, as they are minor expenses on personal credit cards that happen to be used for business purposes. If this data were to unveil massive amounts of credit racked up on personal cards used by small business owners, we could infer otherwise, but this is not the case. Also, 60% of those who hold both cards say that their business card is preferred over their personal card.

The Federal Reserve states, “In 2009, 83% of small business owners used credit cards for their businesses, and 18% borrowed on them.” However, counters the NFIB, “only 4% of businesses that use credit cards, do NOT pay off their balance monthly, and have no other source of credit.” Only rarely are business credit cards the company’s sole source of capital; in fact, only rarely are they a source at all.

An Issue Beyond Swapping Credit Cards

A decrease in small business lending could perhaps be more easily attributed to declines in demand or supply for loans. In particular, many alternative sources of credit have surfaced for small businesses to tap into. Perhaps the emergence of new lines of credit is responsible for the reported drop in small business lending, rather than a shift in credit card preference. The recent decline in credit, as reported by the SBA, only includes loans made on small business credit cards, excluding micro-loans. Attributing small business micro-loan transactions might rule out the hypothesized shift in capital between personal and business credit cards.

According to Claudia Viek, CEO of CAMEO, many small businesses are turning to micro-lenders and Community Development Financial Institutions (CDFIs) for loans, instead of traditional financial institutions. Viek says, “CDFIs usually have more flexibility with their collateral requirements and offer reasonable terms”, in contrast to standard bank loans. Many micro-loan companies offer unsecured working capital for small businesses, at a cheaper rate than personal or business credit cards. Instant credit pre-approval is also usually offered through cash advance programs from micro-lenders. Banks usually hesitate to fund small businesses because overhead costs are the same, no matter the size of the loan. So they are much more willing to fund an established business than a riskier small business enterprise.

While the CARD Act has caused a shift from business to personal cards among business owners, neither is traditionally used as a source of capital. Therefore, it is difficult to attribute the decline in small business borrowing to this change. The effects of alternative funding are more evident than borrowing methods to reflect current small business behavior. Swapping credit cards certainly displays entrepreneurs’ predilection for transparency, and that everyone, whether business or consumer, wants to milk that CARD Act shield for all it’s worth.