- The Washington Times - Wednesday, August 14, 2002

Small businesses are increasingly turning to credit cards for short-term loans, according to a recent report.
U.S. banks last year offered them 10 percent more loans of $100,000 or less, called "micro-loans," than in 2000, the U.S. Small Businesss Administration said.
Loans of up to $100,000 increased the most at 10 percent, while loans from $100,000 to $250,000 increased 6 percent. Loans of as much as $1 million increased 7 percent.
Most of these loans were made using credit cards.
The outstanding micro-loans also increased $5.4 billion from 2000, totaling $126.8 billion in 2001, according to the report released Monday.
Charles Ou, author of the study and senior economist for the SBA, said banks have been promoting the use of credit cards for small-business loans over the past five years. He said the promotions have given business owners a better chance at borrowing short-term capital without having much of a credit history.
"It's an easier process, and credit cards don't require as strict a credit rating as a business loan from a commercial bank would," Mr. Ou said.
Mr. Ou estimated that 94 percent of those who started their own businesses last year, 574,501 nationwide, used a credit card as a main factor for their financing plan.
"Most of the time a credit card is used to relieve quick costs or bills that the owner can pay back in without accruing much interest," he said.
It's a trend that a senior economist for the American Banking Association, Keith Leggett, said is likely to increase for business owners lacking upfront equity to satisfy creditors.
"Most people starting a business use a credit card and their personal savings because it's quicker than filling out the paperwork and cheaper than having to underwrite a loan," Mr. Leggett said.
Low interest rates in the current economy also add to the lure for business owners to use a credit card, said Greg McBride, analyst for the financial consulting Web site Bankrate.com.
"It's advantageous at times like the economy is now, where collateral or security rates have been lowered across the boards," Mr. McBride said. "But it's a better idea to apply for loans worth more than $50,000 because the rates are generally going to be lower than credit card rates and you can often deduct loan payments in your taxes."
The perks of credit-card membership, such as discounts on hotels, plane tickets and other retail items, also are part of the draw for businesses, American Express spokeswoman Susan Korchak said.
"In a recent survey, we saw that a lot of owners use their cards for different expenditures," Ms. Korchak said. "Like a restaurant owner would put half of his wholesale purchases onto his card, and then use a different line of credit or plan for the rest of his expenses."
"Banks judge micro-business owners on their personal spending habits to get an idea of their business spending habits because the two are interconnected," New Century Venture Center's Ms. Ison said. "So if the person wants to expand in the next five or 10 years, he or she should be looking at paying above the minimum balance and staying out of late payments that rack up interest.
"Banks are looking more closely and are wary of taking on more businesses than before," she said. "But with credit cards giving more access to owners, they are going to gravitate to what's available."

LOAD COMMENTS ()

 

Click to Read More

Click to Hide