The Newest Small Business Loan: Credit Cards

Business Week reports that small business owners are are turning to credit cards to finance their businesses. Banks are tightening credit so much that some business owners feel to have no choice to pay upwards of 30% interest on business credit cards.

Take for example, James and Heather Hills, a couple who started a Elgin, Illinois, internet marketing startup, turned to credit cards when they were turned down at three banks for loans. At first things went smoothly for them, paying only 11.74% interest; but after a joint venture went sour, the Hills were left with $10,000 in credit card debt. When a couple of payments were late, their interest  soared to over 30%.

The growth in small businesses using business credit cards is steadily growing according to a federal reserve survey. This survey showed that the percentage of small businesses using these types of credit cards has risen from 34% in 1998 to 48% in 2003. According to Visa, small business spending should hit 4-7 trillion dollars in 2007, but spending on small business debit and credit cards are only 283 million, according to Mercator Advisory Group, an industry researcher. The credit card companies will no doubt be looking to grab a bigger piece of small business going forward.

As the banks continue to tighten credit, small businesses will continue this trend of turning to small business credit cards to finance start ups or use as working capital. Financing a small business with credit cards can provide capital when there is no other alternatives; however , these small business owners have to closely read the terms of their credit card agreements and realize that interest rates can vary with each issuer. Payments can sky rocket if monthly minimum payments are not paid on time, potentially leaving the business and it’s principals faced with monthly payments they are not prepared for.