Crackdown On Credit Limits Squeezing Nation’s 27 Million Small Businesses

Discussion in 'Economics' started by ByLoSellHi, Jun 19, 2009.


    Cutting Off Mom & Pop Credit

    Louis Licata, a lawyer in Cleveland, has decided not to hire three more employees for the firm because credit is hard to come by.

    Published: June 18, 2009

    Louis Licata has shelved plans to hire three more employees for his Cleveland law firm. Jeannie Macone, of Florida, is cutting back on inventory for her trinket and home décor business. In Ohio, Patrick Allen has slashed employee travel and begun paying cash for work dinners with clients of the marketing firm that he started from scratch.

    A crackdown on credit limits by card companies is squeezing the nation’s 27 million small businesses, exacerbating the problems brought on by a stagnant economy.

    Owning a small business has always been a challenge — half wind up failing within the first few years. But the financial crisis has dealt them a one-two punch, as big banks cut the credit card lines that many entrepreneurs were forced to lean on when a once-abundant supply of loans dried up.

    As of April, 59 percent of America’s small firms relied on credit cards to help finance their day-to-day operations, up from 44 percent at the end of last year, according to the National Small Business Association.

    The number of small-business owners who depend on a credit card to buy items as varied as paper clips and heavy equipment has climbed steadily over the years, from just 16 percent in 1993. Today, that group makes up 11 percent of the revenue for Visa and MasterCard, from 3 percent in 1998, according to David Robertson, who publishes The Nilson Report on the credit card industry.

    But credit card terms have worsened sharply with the recession: three-quarters of small business said they have seen a large cut in limits over the last six months. That would not be so bad if other forms of credit were easily accessible. But banks and credit card companies, which opened their coffers when the economy was flourishing, are now pulling back from nearly everything that hints of risk.

    “I’m a business in a bad time that wants to expand,” said Mr. Licata, who added that he had been unable to get loans at Cleveland’s banks since the recession set in. Recently, the limit on three of the credit cards he uses for his law firm was slashed by a total of $60,000, he said, dousing plans to enlarge his business.

    Of course, consumers have been squeezed by higher interest rates and reduced credit lines by credit card companies, too. But small businesses were not included in the credit card reform legislation signed into law last month by President Obama, which limits excessive fees and interest rate increases on existing balances starting next year. A bipartisan coalition of senators is seeking to extend the legislation to small business.

    “The way that the economy is going to come out of a recession is not by big business hiring but by small business hiring,” said Senator Mary L. Landrieu, Democrat of Louisiana, who is championing the measure. Denying small businesses access to credit is having “spiraling” effect on the economy, she added.

    Bankers say that credit card companies have no choice but to reduce credit to small businesses. Credit card delinquency among small-business owners is more than 12 percent, roughly two percentage points higher than credit card charge-offs among consumers, according to Mr. Robertson of The Nilson Report.

    Kenneth J. Clayton, senior vice president of card policy for the American Bankers Association, said applying the credit card reform law to small businesses would further crimp credit, since it would limit credit card companies’ ability to manage risk. Already, he said, the companies have had to restrict credit to small businesses because of rising defaults and uncertainty.

    “They are looking very closely at the ability of small business to pay them back,” he said. “They have to. They have no choice.”

    Tom Sclafani, a spokesman for American Express, said credit lines offered when the economy was booming might not be appropriate when growth contracts. The company has been cutting credit lines based in part on the overall debt level of the business.

    “What we are trying to do is strike a balance between a customer’s spending needs and managing credit risk,” he said.

    American Express offered the first credit card tailored to small business 20 years ago. Other companies came onto the playing field over the last decade, when a healthy economy turned small businesses into a lucrative source of new accounts as the consumer market became saturated.

    Credit card companies became increasingly aggressive in soliciting new business. Many banks began offering their own credit cards to small businesses, in lieu of loans. And many small vendors began preferring, or even requiring, payments with credit cards.

    Where small businesses had traditionally relied on bank loans, personal savings or relatives to help pay for their operations, credit cards provided additional flexibility and ease. Low introductory offers and rewards programs were icing on the cake.

    The market grew so rapidly that at least one company, Pennsylvania-based Advanta, decided to focus exclusively on credit cards for small-business customers. By 2006, just five years after it was founded, its profit from business credit cards surged 54 percent over the previous year. Eventually, more than one million small businesses took an Advanta card.

    Then the economy went into a tailspin, and took Advanta’s fortunes with it. The company last month announced that it would no longer pay for additional purchases, leaving many customers in a bind.

    Now, small businesses “are really having to scramble because often they don’t have the kind of flexibility they had before,” said Todd McCracken, president of the National Small Business Association. Further, credit scores of small businesses have been hurt as banks cut credit limits, making it even harder to get other types of credit.

    “It feeds on itself,” he said.

    Mr. Allen, the owner of the financial and insurance marketing firm in Ohio, said he recently took some insurance agents on an Alaska cruise where he tried to charge drinks and several side trips on his credit card, only to be denied. To his astonishment, his limit had been cut with no notice.

    After he returned to Ohio, Mr. Allen said he met some clients for dinner. Normally, he said he would have whipped out a credit card to pay the bill. Instead, he paid in cash. Mr. Allen said he has also scaled back travel because credit was tight and business was slower than normal.

    “You’ve got to play a balancing act,” Mr. Allen said. “This is going to be a moving target.”

    Mrs. Macone, the owner of the business in Florida selling equestrian-themed trinkets and home décor to retail outlets, said she had to retool her business in part because the credit lines on her cards were suddenly slashed, even though she maintained she paid her bills on time. Traditionally, she has relied on her credit cards to purchase inventory, which she then paid off as her customers settled their accounts.

    But last fall, Ms. Macone, who took out a credit card with Advanta, opened her bill to find the company had raised her interest rate above 30 percent. A short time later, Advanta reduced her spending limit from $30,000 to $5,000. “When you have a business, it’s like, ‘$5,000? Please, what good is that?’ ”

    Advanta said it was responding to worsening conditions. “Across the card industry, card issuers have been increasing interest rates and reducing credit lines to protect themselves against a riskier economic environment,” said Amy Holderer, a spokeswoman. “We are no different.”

    Ms. Macone said she has had to lay off three part-time workers who used to assemble orders for shipment in her warehouse, and cut the hours of two other employees. “I’m the warehouse help now — my husband and I,” she said. “I’m back out there picking orders. I haven’t picked orders in 10 years.”
  2. As of April, 59 percent of America’s small firms relied on credit cards to help finance their day-to-day operations, up from 44 percent at the end of last year, according to the National Small Business Association.

    44% to 59%.

    Probably small business are ticking time bombs.

    Increases due to higher expenses, a/r are taking longer to pay, no replacement customers for any projects completed or customers that have gone out of business.
  3. Creditcard bill from congress only raises the cost to small business.....Obama and the unions do not like small business. Small business weakens unions. This is the heart of class warfare. All the Obama policies raise cost to small business
    Minimum wage
    taxes on the wealthy
    health care(just wait)
    paid Family leave (its coming)
    partner benefits
    general regulations
  4. S2007S


    Small businesses are going to be squeezed no matter what and the problem with that is that the only way out of this weak economy is to create small businesses because they create around 65-75% of our jobs in this economy. So as 27 million small businesses are squeezed, the end to this recession will only extend into a longer time frame.
  5. I never understood this logic.

    When an industry is in trouble with costs or slacking demand, there is likely going to be consolidation among the major players.

    So why does growth in a recession have to come from small businesses?

    They should consolidate into chains just like "big businesses" do when they're in trouble...
  6. Pascal


    Why would a bank want to extend more credit to small businesses during a consumer meltdown? That's just bad banking in my opinion. Once the worst of this is over, you will see credit slowly return. If these small businesses are financing their operations with 13% plus interest rates, they need to go out of business because they are idiots.
  7. lrm21


    Prunning of oversupply of businesses at all levels is necessary in a downturn.

    But the growth always come from small bussiness because they are the drivers of employment and new hires in the country.

    In addition small business are able to better navigate general down turns because they service niche markets and dont work on quarterly numbers to make shareholders happy.

    Many large companies are laying off to meet profit targets but not because they are losing money per se and because they scan squeeze their employees because of an oversupply in labor.

    What is suicidal is the Washington approach to in effect hurt and punish small businesses through
    increased taxes, regulations and costs. Washington is a friend of Corporate Statism not small individual businesses.

    Large Businesses prefer to operate in a consolidated market where revenue streams are insulated from innovation and markets are carved up. See Big Auto, anyone dare start a car company today?

    Survey: Most small businesses expect to grow in '09
    Sacramento Business Journal

    Despite the recession, 70 percent of small businesses anticipate moderate to significant growth in 2009, according to the Small Business Attitudes & Outlook survey conducted by Constant Contact Inc.

    Waltham, Mass.-based Constant Contact (Nasdaq: CTCT), a provider of e-mail marketing for businesses, conducted the survey with the Association of Chamber of Commerce Executives, SCORE and the Association of Small Business Development Centers.

    Other survey results show that 47 percent of small businesses plan on hiring employees this year.

    “The results of the survey reveal the optimism and perseverance that so often marks this spirited group of business owners, as well as their adaptability to meet current economic conditions,” said Gail Goodman, chief executive officer of Constant Contact, in a statement. “These companies show us all what it takes to succeed in any economic climate."

    Washington (D.C.) Business Journal
  8. By the way, I've mentioned this before, but it appears the hostility is a two way street.

    Gas stations near me discount gas by as much as 12 cents per gallon for cash buyers.

    If I were in the retail business, I'd do everything in my power to avoid paying 3% over to a credit card processing company, which robs 3% of my gross margin at the time of sale, especially at a time when credit card issuers are slicing and dicing credit lines to consumers and small businesses.