With bank credit tight, more small-business owners are relying on credit cards to cover short term — and in the current economy — even long-term expenses. But buyer beware. Many so-called “business cards” carry high fees and interest charges that could leave small firms in an even deeper financial hole.
A May, 2011 study by the Pew Charitable Trusts analyzed business credit card application disclosures and household direct mail solicitations from the nation’s 12 largest credit card issuers, which control about 85 percent of the small-business credit card market. The results aren’t pretty.
Here’s the problem. Congress enacted the Credit Card Act in 2009 to curb some of the worst credit card industry abuses. But what many small-business owners may not realize is the measure amended the Truth in Lending Act, which does not apply to “business” or “professional” credit cards.
Even so, business card holders — and not their businesses — are liable for all expenses, fees, and charges. In effect, that means business cards are really consumer cards, but without the legal protection consumer credit-card holders usually expect.
The Credit Card Act contains a number of important consumer protections. Among some of the more significant, it prevents banks from changing the card’s terms during the first year and requires 45-days of notice after that. It also bans penalty interest rates on existing balances unless an account becomes delinquent by 60 days or more.
Penalty fees also must be “reasonable and proportional.” Generally, they are limited to $25 for the first violation of terms and $35 for additional violations within six months. By proportional, banks can’t charge a fee that is more than the balance. If a card balance is $4, for example, then the fee can be no more than $4.
None of these protections, however, apply to business cards. The Pew study found that 80 percent of business cards included an “anytime” change in terms clause with no right to opt out. Another 67 percent of business cards had penalty rates for late payments or over-limit charges. The median penalty annual percentage rate (APR) was 29.4 percent, which would be illegal on a consumer card. As for penalty fees, 73 percent include a late fee (median amount: $39) and 67 percent of business cards included an over-limit fee (median amount: $39), according to the study.
Banks know a gold mine when they see one, and they have been marketing credit cards especially heavily during the financial crisis. American households received over 2.6 billion business credit card solicitations between January 2006 and December 2010, according to the Pew analysis. Solicitations peaked at 91 million in December 2007 as the nation slid into the Great Recession.
Business credit cards became an increasingly important part of the major banks’ promotional efforts during that time. In January 2006, only 1.7 percent of all card solicitations were for business cards. By Feb. 2009, the number of solicitations for business cards had risen to 23.4 percent of all solicitations.
While the number of business credit cards in circulation is unclear, the study estimated that 11 million “small business” credit card accounts are active, with an average of 1.4 cards per account.
Given the disparities between business and consumer credit cards, some small-business owners may opt to simply use their personal credit cards for business expenses. But at least one consumer website, Credit.com, cautions against the move. Combining personal and business expenses on a personal card can hurt your credit score, prevent or complicate business deductions, and could possibly trigger an IRS tax audit.
Even so, 42 percent of small employers used a personal credit card for business purposes, up about 3 percent from 2008, according to a 2010 survey by the National Federation of Independent Business (NFIB). The majority (54 percent) used one card, while 24 percent used two cards and 20 percent used more than two card accounts.
About 30 percent of these businesses carry a balance each month. Of those, the majority have outstanding balances of more than $5,000, and half of those have more than $10,000 outstanding.
In contrast, 64 percent of small firms use business credit cards. While 59 percent use just one business credit card, another 29 percent use two, 6 percent three and 4 percent use four cards or more. They charge a median of about $2,500 per month on their card(s). About one in five charge less than $500 per month, while 10 percent charge $10,000 or more, the NFIB survey found. Of those, 80 percent pay their balances every month, while 20 percent do not.
Fortunately, the problem of abusive practices involving business credit cards has not gone unnoticed in Congress. Rep. Nita Lowey (D-N.Y.) and 10 cosponsors have introduced The Small Business Credit Card Act of 2011 (H.R. 1137). It would extend the Credit Card Act protections to credit cards used by small-business owners whose companies employ 50 or fewer workers.
The measure is strongly endorsed by groups such as the National Small Business Association, a Washington, D.C. trade organization. But the influential and well-heeled banking industry is waging an all-out war against the measure and other reforms. The industry, for example, won a significant lobbying victory at the expense of small businesses when the Federal Reserve enacted its final “swipe fee” rules.
In what the NSBA characterized as a “major capitulation to the banking lobby,” the Fed’s final rule set a swipe fee base of 21 cents per transaction, with no set cap. As originally proposed, the cap was set at 12 cents per transaction. “The final rule grants big banks a more than 500 percent profit every time a consumer uses a debit card. To the small-business owners forced to bear the burden of this exorbitant profit margin, this hardly seems “reasonable and proportional,” the NSBA said in a statement.
“It is especially troubling that the Fed failed to provide new financial data or any further justification for adopting a final rule with a ‘cap’ more than 75 percent higher than its proposed rule,” the NSBA said. Although the fee is 75 percent higher than its proposed rule, there is one consolation: It is less than the average swipe fee in 2009, which was 44 cents, according to the Fed.
But the battle doesn’t end there. A number of bills have been introduced in Congress to weaken the long-awaited Consumer Financial Protection Bureau, the only significant consumer reform to emerge as part of the broader Dodd-Frank law in the wake of Wall Street’s financial collapse. Ironically, bureau opponents claim the new agency will hurt small businesses. But 67 percent of 1,200 small-business owners surveyed nationally last year supported the bureau, while only 13 percent opposed it, according to Jacquie Germany, who owns Nina’s Nuances interior design firm in Montclair, N.J., and is a member of the Washington-based Main Street Alliance National Steering Committee, which advocates for small-business owners.
Small businesses are already facing enormous hurdles in the current economy without carrying banks on their backs through exorbitant credit card costs and outrageous overdraft fees that are illegal for average consumers. Congress needs to do all it can to improve the business climate for small firms, and correcting this gross disparity would go a long way toward doing that.