Financial Resources For Northwest & West Central Ohio Entrepreneurs
Entrepreneurs are increasingly relying on credit cards and charge cards to finance their businesses, especially early-stage companies. Credit cards and charge charge cards are almost identical in appearance and function with the exception that charge cards are issued by a vendor (e.g. Sears) and can only be used for purchases from the vendor. The percentage of firms using credit cards has jumped from 16% in 1993 to 44% in 2008 according to surveys by the National Small Business Association (NSBA). In the same period, the proportion using bank loans dropped from 45% to 28%. A Federal Reserve survey showed that the percentage of firms using business credit cards jumped from 34% in 1998 to 48% in 2003. Surveys from the NSBA and the Fed show that between 20% and 30% of all small businesses carry a revolving credit-card balance, rather than paying their bills in full each month. Many small businesses are unable to obtain credit cards in the business name (unless personally guaranteed by the owner), thus small business owners often obtain credit cards in their name to make needed purchases on behalf of the business.
The business credit-card market is dominated by large banks. In 2005 the top 10 U.S. banks controlled 83% of the small business credit-card market, according to a report by research firm TowerGroup. Credit cards are also issued by non-bank financial services companies. American Express grew to be one of the largest non-bank credit card issuers (although it converted to a bank holding company in November 2008). Credit card issuers earn money through various user fees, interest on unpaid balances, and transaction fees charged to merchants who accept the credit card. They use credit card processors (e.g. VISA, MasterCard, Discover) to process purchase transactions.
Businesses of all sizes use credit cards for the following reasons:
Credit cards are issued under less stringent borrower credit standards and performance monitoring than traditional commercial lender loans, and there is often little or no collateral. Thus, credit card issuers charge much higher interest rates to compensate for their additional risk (the average APR on cards in 2010 is 14.67% and average default rate is 13%). Credit-card issuers reserve the right to change the loan terms at any time. Thus, credit card interest rates can be unpredictable and volatile, and even the availability of credit can be withdrawn any time an issuer feels that the ability of the credit card user to repay debt is impaired.
Credit cards can be a very useful and cost-effective tool for businesses to manage small transactions and for short-term financing needs. Although credit cards can be an expensive and risky way to obtain longer-term financing, sometimes businesses have no other choice to achieve success.
There are many sources of credit cards. There may be very different lending preferences and terms among alternatives, thus some credit card issuers may deny your request while others are pleased to help. The best place to start your search is with financial institutions (e.g. banks, credit unions, finance companies) that you have worked with in the past. Many credit card issuers advertise through the internet and mail and make it very easy to apply. An excellent web site to obtain information about credit cards is www.creditcards.com.