Should The Credit CARD Act Extend To Business Credit Cards?

If yesterday’s stock market performance is any indication, we’ll see a retrenchment in which investors and lenders alike reassess small businesses’ probability of survival. More banks are rejecting small business loan applications – according to Pepperdine University, 60% of applications are denied – and this trend seems likely to accelerate. Sclerotic credit markets, combined with weak sales, have led many business owners to turn to credit cards to fund their operations. According to the Federal Reserve, more than 80% of small businesses use a credit card to provide working capital, and 80% of that number use business credit cards. Not only has credit card use risen, but the amount of debt on the cards has grown as well.

Credit cards for businesses differ from personal cards in a few key ways: the interest rates can be lower, the credit limits are often higher, and the cards are not subject to the consumer protections enacted by the Credit CARD Act of 2009. This law prohibits arbitrary and unannounced interest rate hikes, among others. Though banks are required to give personal credit cardholders 45 days’ notice before raising interest rates, they need not do the same for business cards.

Will the CARD Act strengthen protection or tighten lending?
Some members of Congress are already formulating legislation that would extend the CARD Act’s provisions to business credit cards. Senators Jack Reed of Rhode Island and Chuck Schumer of New York joined fellow Democrats in asking the Federal Reserve to require banks to explicitly state that business cards are exempt from the CARD Act’s protections. On the other side of the Capitol, Representative Nita Lowey of New York introduced a bill requiring that the CARD Act apply to businesses with less than 50 workers.

But the American Bankers Association, a trade group that represents JPMorgan Chase, Citi, and Bank of America, among others, contends that limiting interest rate hikes would serve to tighten credit further. Small businesses are already a risk, the argument goes, and doubly so in a shaky economy. In fact, small business credit card loss rates are 20-30% higher than consumer loss rates. Restricting the interest rates banks could charge would only make them more selective in extending lines of credit. Since businesses are so frequently denied loans, credit cards are often the only way to finance a business.

In the meantime…
What should a small business do while Washington battles out the Credit CARD Act? A business with few enough expenses could use a personal credit card, which is covered by the Act, though credit limits tend to be lower on personal cards. A loan from a bank is ideal for larger financing projects, and although larger banks have notoriously low approval rates (8.9% in June), small community banks tend to be more accepting (their approval rates are nearly five times higher).

Those who use business credit cards should be warned, however: any missed payments or excessive debts will affect their credit score. What’s more, interest rates on credit cards are often higher than those on small business loans, so a company could easily find itself mired in the same mess that so many American consumers are in.

Tim Chen is the CEO of NerdWallet, a credit card company dedicated to helping consumers find the best in rewards credit cards.

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