SmallBizResource Blog -- Government

Stuck Between A Credit Card And A Hard Place

Posted by Gayle Kesten Friday, May 22, 2009, 12:03 PM ET

Common small-business wisdom holds that you should separate your personal credit-card expenses from your company credit-card expenses. But will that truly be in your best interest -- no pun intended -- when President Barack Obama signs into law today the Credit Card Accountability Responsibility and Disclosure Act?

Not necessarily. Even though the legislation's intention are aimed at ending abusive credit-card practices (good luck with that), bear in mind the following, according to this CNNMoney.com article:

"Because the new law amends the Truth in Lending Act, which only governs consumer loans, it doesn't apply to corporate cards. What this means is if you use your personal card to make business purchases, you'll be covered by the new protections. Likewise, business cards based on your personal credit -- as is often the case for sole proprietors -- should be covered as well. But for limited liability corporations and other companies that use traditional corporate cards, the same old rules will continue to apply. An amendment proposed by Senators Mary Landrieu, D-La., and Olympia Snowe, R-Maine, to extend protections to any businesses with 50 or fewer employees was defeated in the Senate last week; instead, the final bill directs the Federal Reserve to conduct a study of credit-card use by small businesses."

According to the National Small Business Assocation's newly released Small Business Credit Card Survey (PDF), credit cards continue to account for the largest single source of financing being used by small businesses (59%) today. That's up 10 percentage points from when the question was last asked in December 2008. So what kinds of protections will bypass a segment of the small-business population who diligently avoid mixing business with pleasure? From The Wall Street Journal's Washington Wire blog, among the changes the bill goes after:

• Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
  
• Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
  
• Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
  
• Bills: Issuers must send a bill 21 days before the due date.
  
• Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
  
• Disclosure: Cardholders must get 45 days notice of change in terms.
  
• Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.

How much could small-business owners using corporate cards be helped by the credit-card act? The NSBA's survey of 288 small-business owners (roughly 70% of whom operate with no more than 20 employees) also found:

• 86% reported using their consumer or business credit cards primarily or exclusively for business purposes.
  
• 79% say the terms of their credit cards have gotten worse during the past five years.
  
• During the past year, 63% have seen their interest rates rise, while 41% watched their credit lines reduced.
  
• 60% carry a balance on their credit cards month to month
  
• One-third of respondents reported receiving their credit card bills AFTER they were due; 57% said their statements arrived so close to their due dates that payments would never arrive on time.
  
• 60% said the rules regarding late payments vary from credit card to credit card.

The survey also asked how lack of access to capital is affecting small businesses. The top five responses:

--Reduced the number of employees: 62%
--Unable to grow business or expand operations: 56%
--Reduced benefits to employees: 43%
--Unable to finance increased sales: 34%
--Not a problem/No effects: 24%

Conversely, here are the top 5 actions small businesses said they would take with access to the capital they need:

--Hire additional employees: 46%
--Invest in new plant or equipment: 40%
--Invest in advertising: 37%
--Increase benefits to employees: 23%
--Would not make any changes: 19%

Meanwhile, Huffington Post blogger James Boyce clearly couldn't care less about those stats or, for that matter, the legislation, which he calls "one of the most unneeded pieces of legislation ever EVER created out of Washington." He states, IN ALL CAPS: NO ONE NEEDS A CREDIT CARD FOR ANY REASON WHATSOEVER. NONE. Boyce relies on a debit card for his business, and says anyone "stupid enough to pay 30% interest to borrow money...not to pay your bills on time, or accept your rate being jacked up overnight, should be penalized."

What do you think? Do you use your personal credit-card purchases for business purchases? Where is lack of capital hurting you most? How would you spend it if you had it? Is it really feasible to run your business off of a debit card?

Government

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