Last week the House Committee on Small Business examined the role of credit cards in financing small business. Without capital, small businesses can’t grow, and the American economy loses out on their important contributions. In the current economic climate, however, small firms are finding it difficult to secure affordable financing. And the reality is that if you don’t look for cash when your business is flourishing, you sure won’t find it during a downturn which could cause you some serious cash flow problems.
“When a small firm can’t buy equipment, or has to lay off its workers, our entire economy suffers,” said Chairwoman Nydia M. Velázquez. “These businesses are the principal drivers of our economic growth, but without capital they can’t lead us back to recovery.”
In a recent Federal Reserve survey of senior loan officers, 65% of respondents reported tightening lending standards in the first quarter of 2008. The impact of this move is compounded by federal loan programs — such as the SBA’s 7(a) initiative — which are increasing fees and making it more difficult for entrepreneurs to get financing. Witnesses at the hearing noted that because SBA’s programs are falling far short of their intended purpose, they are having to turn elsewhere to meet their capital needs. This has contributed to small firms’ increased use of credit cards — up 14% in the past five years alone.
“With fewer options in the private market, and in the midst of an economic downturn, it is inexcusable for SBA to make it tougher for small firms to get capital,” said Chairwoman Velázquez. “Affordable financing means access to opportunity. No one understands that better than a small business owner. That’s why many are turning to plastic — to keep their businesses and our economy going.”
Credit cards have always been a convenient means of payment for small firms — expediting transactions and allowing for considerable ease and security. Witnesses also discussed how entrepreneurs leverage use of these financial tools, and said they are an increasingly important part of their financial strategy. The testimony also underscored that 70% of small businesses pay off their full balance each month. That gives them the equivalent of 30-day interest-free loans, which makes charging purchases all the more practical. (That’s a good thing!) Witnesses stressed that this is just one example of how credit cards give them the flexibility they need to run their businesses.
“Our small firms are facing a considerable financing gap. Viewing credit cards as the tools they’ve become for small firms just makes sense,” said Chairwoman Velázquez. “We must strengthen what is working in the current system and correct what is not.”
What about you? Have your financial sources dried up? Are you using your credit cards for business cash flow purposes? Leave me a comment.