These days, many small business owners are trying to expand their operations in one way or another, and instead of turning to loans as they have in the past, many are now using credit cards to finance these changes.
The Small Business Administration recently noted that the amount of small loans to businesses- defined as those of $1 million or less - dipped 4.7 percent in 2011, and this change may be due to an increase in credit card use among business owners, according to a report from Bloomberg Businessweek. Currently, small loans to these privately owned businesses are now three quarters lower than the all-time peak observed in 2008.
One reason that these declines have been so marked is that demand for credit of nearly all types is simply weaker than it was before, and the still-recovering housing market has further hampered small businesses years after the recession came to an end, the report said. And because of the economic downturn, lenders are still keeping many of their credit qualifications tighter than pre-downturn levels, meaning that even those who might want to seek credit may be discouraged by their own standing even before attempting to do so.
But another possible reason for this downturn in small business loans is that the Credit Card Accountability, Responsibility and Disclosure Act has allowed companies to take on more debt on a revolving basis, rather than through traditional financing, the report said. Federal Reserve data shows that in 2009 - the most recent year observed - 83 percent of small business owners had at least one credit card for their companies, and 18 percent carried a balance on them.
Meanwhile, additional information from the National Federation of Independent Business shows that more small business owners are using their personal cards - which carry more financial protections than those for businesses - to finance company purchases, the report said. In 2011, 49 percent of small business owners did so, up from 42 percent in 2009. Further, the number of those using business-specific cards slipped to 59 percent from 64 percent.
It may be difficult for small business owners making company purchases on personal cards to keep track of these transactions for tax purposes. To that end, lawmakers have proposed that consumer protections be applied to those for businesses as well, the report said. However, an attempt to push that type of legislation through by U.S. Rep. Nita Lowey, a Democrat from New York, didn't make it out of Congress late last year.
Studies have shown that small businesses that have access to cards are better able to expand their operations and take on more employees than those that don't. Using cards grants companies and consumers alike added financial flexibility and can be an extremely beneficial tool to those who manage this type of credit responsibly.