Credit Card Crunch Casualty: Small Businesses

Readers no doubt recall that the Fed announced the creation of the Term Asset-Backed Securities Loan Facility, which will lend as much as $200 billion against new or recent vintage asset backed securities collateralized by “student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.” One wonders if the order reflects the Fed’s priorities.

Most commentators saw this as part of an effort to jump start consumer spending. But this may all come too late to help an important and neglected target, small businesses.

Even though the Fed’s press release gave lip service to assisting small enterprises, they may have meant the SBA component. However, credit cards are an important source of funding for small businesses. Indeed, Amar Bhide, in his landmark book, The Origin and Evolution of New Businesses, found that savings, friends and family, and credit cards were the most important sources of funding for startups. And they are also important on an ongoing basis. For instance, a friend who had a 100 person company with some outside investors, nevertheless maxed out on his credit cards more than once to keep the enterprise afloat. So it isn’t just teeny operations that find credit cards a valuable source of funding.

I’ve been told that American Express, which aggressively courted small business owners, has turned of the spigot on some important products. I don’t know the full scope of Amex’s credit business offerings, but it had at least two types of credit lines, one a free standing program “Business Capital Line” which had an annual fee, and one attached to the Corporate Optima card.

The particularly useful feature of both was that they provided checks, and offered better rates than bank overdraft lines and reasonably high credit limits. They were good for businesses of that awkward size where they might not be big enough to capture the attention of the business lending area of a bank (and based on some tales I have heard, I would never have unsecured borrowings with the same bank where I carried significant balances, which is precisely what the banks want you to do. Banks have been known to grab all the deposits, business and personal, of an indebted business that looks to be in a terminal decline. And even though they do not have the right to seize the assets willy-nilly, guess what? It’s kind of hard to fight them when they have all your dough).

Even a well managed business with with reasonably stable revenue has unexpected events. Shit happens. An owner can dig into his own pocket, but access to credit can not only tide over short-term cash needs, but also provide expansion capital.

So what has Amex done? it has effectively closed down both products. Business Capital Line credit for checks has been cut to 1/10th the available credit for the moment, with no new checkwriting at all as of the new year; the Optima Credit line has ended all checkwriting (customer can use the card for purchases, where Amex earns a fee from the merchant).

Now those customers who used the Amex products in lieu of a bank credit line are stranded. Think a bank is going to give a small business owner new to them a meaningful level of credit in this environment? Doubtful.

While banks are cutting credit exposures fast and hard, this move is dramatic, particularly in light of Amex’s previous efforts to target this market.

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  1. Anonymous

    on the other side of this, one of my co-workers in NY was offered a massive personal loan with just his signature. The toxic loans are still being given out and good loaning practices are being crowded out, this whole market is insane.

  2. William

    This is certainly true, and it’s something we’re not seeing a lot of coverage of. Just in my (small) businesses, we’re definitely feeling the effects of a cash crunch – every business needs access to credit, and it is often that much more vital the smaller the business is.

  3. Anonymous

    29 yrs ago when i was in law school they did the same thing. volcker implemented reserve requirements requiring banks to post 10% reserves for all unsecured lines of credit. I had a gold Amex and it was $25 more than green and it said in the application you got a line of credit and how much you got was up to your ability but at least $2,000 was guaranteed. I threatened them with a class project in litigation cause if you PAY for a credit line its perfected and they cannot take it away if your circumstances havent changed. Read the fine print and call a lawyer. Don’t be a chump (assuming you’ve paid a fee to get a line of credit and you can establish some minimum you were promised).

  4. ladderowner

    Loan availability or not, entrepreneurs are now, and always will be, probing (sniffing really) the dark recesses of our economy. All the while ferreting out opportunities. Some will succeed many will fail. Really? Nothing new. EXCEPT, it is exactly these small businesses that will earn our hard earned capital, make new jobs and turn around this rusty old bus we call “the economy”.

    Let the greedy big corp slimeballs rot in hell. Let their cronies sit in bread lines.

    Don’t climb the corporate ladder. OWN IT!

  5. Anonymous

    Well, Visa sends me one of those ‘convenience checks’ every month in the hope I’ll bite.

    Just wondering- if the credit is in the name of the corportation, not the individual, wouldn’t they be in a worse situation in event of bankruptcty? I’m not a lawyer, but there is that ‘limited liablity’ thing, isn’t there?

  6. Anonymous

    If I have it right, the Amex credit was cheaper than those checks those credit card companies send. They are either at a high rate or at a teaser for 6-9 months.

    And all those business cards (and I assume the Amex products are the same) are guaranteed personally. Read the fine print. A real small business loan is not (or at least you can get ones that don’t require that, but again you need to shop and read fine print).

  7. Anonymous

    Meredith Whitney has an article in the Financial Times covering a similar aspect entitled America must keep consumer liquidity flowing. Whilst Meredith is talking mainly about consumer credit cards it is not much of a stretch to extend the thinking to small business credit cards. Here estimate that 90 percent of people use the cards as cash-flow management vehicles, or revolve payments at least once a year is quite frankly frightening. Meredith states that she is more bearish today than she has been in the past 18 months and proposes a methadone-clinic-style rehabilitation rather than a cold turkey approach to credit.

    The problem is that this implies the prudent must bailout the imprudent. It is worth noting that Michael Geoghegan’s the chief executive of HSBC (a bank who have had no bailouts) says state-sponsored bail-outs of western banks risk rewarding management teams for failure. Running your business with so little cash that you need to use credit cards quite clearly shows bad management. The credit crisis has been running for over a year and for management not to have taken steps to limit their exposure to credit being withdrawn is irresponsible. From a jobs point of view I sympathize with Meredith’s view but someone has to stump up the cash to lend to these businesses and that has to ultimately be the tax payer. Lets let our children pay the bill.

  8. OutsideTheBox

    Interesting perspective on things.

    The dependency on the drug “credit” is more widespread than I initially thought.

    The more I watch this ‘credit crunch’ debacle the more I am becoming convinced of the utter needlessness and harm involved in *any* credit entanglement.

    What credit is, is a replacement for an enterprise having its own capital.

    So this enterprise then involves a middleman, a creditor, who may or may not have what the enterprise has now come to *need to survive* … and/or may or may not be willing to provide it to the enterprise.

    Sort of like a human becomes addicted to an opiate, and cannot even function without their ‘fix’. (And might one say that lately markets have been convulsing some?)

    The use of credit to supplant what is otherwise simply prudent self-financing is a stupid, risky thing to do!

    So as we now observe the credit markets in spasm – do we administer methadone-flavoured financial aid via State Handouts, or do we do a cold-turkey/hard-break and get off the Stuff?

    I’d wager we, as a society, don’t learn the lesson … we won’t until the consequences become truly grave enough.

    (Haven’t owned a credit card in nearly 20 years).

    The other aspect of the biggie US banks collapsing, that I’ve not seen mentioned, is: looking back was it such a good idea to let these banks get so big that the entire nation was now dependent on their continued solvency?

    That too seems to be a needless introduction of risk to a nation’s financial stability. (Never mind that the few remaining stable banks are buying up the unstable ones, further exacerbating the concentration problem.)

    I wonder if that issue will come up at the next competition-hearings, for the next monster merger.

  9. Anonymous

    The SBA is not helping matters any for small businesses. I personally know of one business that applied for an SBA disaster loan as a result of Hurricane Ike in Houston. The business lost power for 2 weeks and was unable to open or was open for limited hours. Business revenues had declined over the last year due to the economic issues. The SBA denied the loan due to cash flow concerns. They admitted that the business had good credit, paid bills on time, etc. but simply stated that they were a cash flow lender.

    What part of disaster do they not understand? What choice does a small business have but to then turn to credit cards for funding? If the government can bail out the big guys, how about putting up something for the small ones?

  10. Duncan Echelson

    What I know is: the government put $25b in Wells Fargo and Wells cut my credit line in half and is charging me the same annual fee. So for me, the attempt to keep the credit flowing is a flop so far.

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