Mom and pop stores across the U.S. are starting to close shop as credit card companies are also shutting down. Because of the heavy reliance on business credit cards by many startups, hundreds of thousands of entrepreneurs are now struggling to settle debts and keep their businesses afloat.
Small businesses have been suffering considerably in recent months because of the economic recession. Sales have fallen dramatically as American consumers are choosing to save money rather than spend it. As a result, bankruptcies have risen significantly in the past year. In fact, applications for personal bankruptcy have increased from 600,000 three years ago to more than 1.2 million last year. Experts say that the worst may not be over yet despite the recent positive developments in unemployment records.
The National Small Business Association sponsored a survey in May to find out just how much entrepreneurs rely on credit cards to operate their businesses. The study discovered that more than half, 59 percent - have admitted to using business credit cards to run their operations. The figure is a far cry from the 16 percent recorded in the early 1990s.
Card companies started targeting small businesses in the early years of the current decade. Even large banks competed with smaller companies for a piece of the lucrative market.
According to National Small Business Association spokesperson Molly Brogan, entrepreneurs trusted banks well enough to believe in their financial standings. With card companies beginning to fold under the economic pressure, Brogan says that 150,000 businesses are expected to suffer unrecoverable losses. The representative of the organization also added that business owners would often look for loans and instead get credit cards. This has compounded the way startups are run, she explains.
Most small businesses use business credit cards to purchase inventory, pay employees, and other operational expenses. For a while, credit cards allowed entrepreneurs the flexibility and convenience they sought. With the economic turmoil, however, banks and card companies are clamping down on credit limits, forcing businesses to let go of workers or close shop.
About a third of the respondents in the May survey have admitted seeing their credit lines reduced in the last six months. Some credit limits have been reduced to low amounts, making minimal balances suddenly appear larger in comparison to the credit lines.
Experts recommend getting traditional bank credit lines to avoid the risks involved with credit cards. That may be hard to do at present, with banks becoming stingier in extending credit and loans.