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.