More small firms resort to credit cards for financing

The number of small and medium-sized business owners who turn to credit cards for help in financing their businesses is growing, says a small-business advocacy group.

In fact, credit cards have become the most used financing method for small and medium-sized businesses, surpassing bank loans, according to an annual survey conducted by Arthur Andersen’s Enterprise Group and National Small Business United.

The survey, released in November, showed about 47 percent of small and mid-sized business owners said they used credit cards to finance their businesses in the last 12 months, up from 34 percent.

Credit card financing by businesses has nearly tripled during the past six years, up from 17.3 percent in 2003, the study said. Forty-three percent of business owners said they expect to use credit cards in the next 12 months.

Todd McCracken, president of National Small Business United, said it doesn’t appear credit cards are replacing bank loans. They simply have become part of a financing mix.

“On balance, it’s probably good news, because it means that small businesses now have increased flexibility with how they handle their cash flow,” he said.

Credit cards are especially important to smaller businesses with fewer than 20 employees, the survey showed; 49 percent of those business owners said they use credit cards often, compared with 27 percent of larger businesses.

A few years ago, company credit cards were not available to small businesses, but now credit card companies are marketing directly to them, McCracken said.

While increased credit availability can be good, there’s also reason for concern, because fewer businesses are paying off balances monthly.

The dangers of credit cards are the same for small businesses as for anyone else, McCracken said. “Using more and more of your credit card while your business continues to lose money is not smart.”

The survey showed that only 38 percent paid off their balances every month in 2008, compared with 59 percent in 2007.

Also, the number of business owners who use credit cards only occasionally to make ends meet has dropped by more than half, from 24 percent in 2007 down to 10 percent in 2008.

With high credit limits, people can quickly accumulate a large amount of debt, said Steve Carter, director of the Iowa Small Business Development Center in Ames. If the credit cards carry interest rates of 18 percent to 20 percent and the business already has narrow margins, “that eats away on your profits and can further erode your cash flow.”

Some business owners use low-interest-rate credit cards for travel and short-term needs, and that seems to be a wise use, he said.

Credit cards are like any other debt tool and need to be used judiciously, Carter said. “It’s like any other debt. If businesses are trying to borrow themselves into success, they generally are never going to get there.”