Credit Lines Evaporate, Credit Cards Take Over

The economic crisis pushed small businesses to put access to cash in their top priority list but banks have become very queasy in extending lines of credit. However, banks are more inclined to offer small business credit cards.

Credit Lines vs. Credit Cards

Credit lines and bank card both offer cash when businesses need it.  The difference between the two lies on interest rates.  Lines of credit have low and fixed interest rates considered by banks as slow moving.  On the other hand, the interest rates for bank credit cards could suddenly jump higher.

Essentially, small business credit cards have already replaced the extension of credit lines.  More and more people are driven to use credit cards because banks have increased their restrictions on extending lines of credit.  Consequently, banks are adjusting their card rates limits based on the conceivable increase of borrowing risks.

Entrepreneurs however have long used credit cards to finance their new ventures.  Small business credit cards however are different from personal credit cards as the former can offer add-on benefits like discounts and extended terms of payment.  

Both types of credit cards however are subject to revolving balances which can grow by several folds as interest rates increase.  Banks can also arbitrarily raise the interest rates and limit the credit capacity of the borrower.

Credit Card Use on the Rise

The National Small Business Association conducted a survey showing that only 28 percent of small businesses have used bank loans.  This is a record low for bank borrowing.  However, nearly 44 percent of respondents said that they used credit cards to finance their business ventures.  57 percent of small businesses said that the terms of their credit card worsened over the past year.

Banks charge incredibly high interest rates on credit cards because many small businesses have failed on their ventures.  However, small businesses are also increasingly getting desperate on finding a credit card provider that has stable, predictable and fair rates.

Unreasonable Penalties

Cases of late payments have been penalized stiffly by banks as experienced by some small business owners.  Usually, their credit card interest rates are only 3.9 percent.  Lenders could suddenly increase the rates to 27.9 percent is a mailed payment arrived late for just one day.

Some small business owners said that the exorbitant and arbitrary rates increase on credit cards have forced them to scuttle further ventures and to lay off more workers.  A bill pending in Congress called Credit Card Holder’s Bill of Rights seeks to address these issues.

Since 2001, small business owners cannot find banks that extend credit lines with lower interest rates than their credit cards.  So, business owners are forced to use their credit cards to fund their businesses.