The Federal Reserve reported last year that there are an estimated 27 million small businesses up and running in the United States. Of those 27 million, over 80% rely on credit cards to furnish at least a portion of their working capital. About 60% of the cards being used are business credit cards, which are not protected under the Credit Card Accountability Responsibility and Disclosure Act, passed in 2009. The CARD Act prevents card issuers from raising the rates on consumer lines of credit without notice, levying over-limit fees that are higher than the balances owed and subjecting pre-existing balances to penalty rates. All of these things occur regularly with many business credit card accounts.
Because of the current struggling state of the economy, poor sales and rigorous lending practices don’t leave many small business owners much choice. They are left to reach for their plastic in order to keep their business afloat. A study done by Pepperdine University revealed that around 60% of small-business bank-loan applications have been rejected this year, whereas only about one-fourth of the small companies that applied for business credit cards were turned down.
Many lawmakers are calling for small business credit cards to be given some of the protection consumers credit cards receive under the CARD act. But bankers insist that strict terms are required to counterbalance any additional risks banks assume when lending to small companies, during this time of economic uncertainty. Any extension of protections would likely result in issuers cutting off the supply of credit to cardholders that pose the greatest risk. Therefore, it would eliminate credit cards as a source of finance altogether.
New York Democratic Representative Nita Lowey proposed a bill in May that would expand the protective umbrella of the CARD act to cover employers with 50 workers or less. Ms. Lowey said, “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.”
The argument bankers pose against restricting issuers from managing their risk is that “small-business credit is different from consumer credit,” explains chief counsel of the American Bankers Association Ken Clayton. He says that when they don’t qualify for traditional loans, small businesses tend to borrow on credit cards. While that access has been sometimes advantageous, he cautions that issuers must get “repaid for the risks they take on in supporting riskier enterprise” or those businesses will find themselves cut off.