October 27, 2009

• Small Business' being Routed to CCs, Pt.1
    The greater picture is clear.

  Studies show that what appeared to be a preference move for hundreds of thousands of small businesses to credit cards, was actually a route away from conventional small business loans. As a yardstick, we need only look to the SBA (Small Business Administration). The number of conventional small business loans they back today has plummeted to less than half of what it was two years ago (99,000 down to 44,000). By the same token, we can see the small business' reliance on credit cards has more than doubled, since that time. This appears to be neither a phenomenon nor a trend. It better fits a design that the banks now favor most. Among other important reasons, up front is the little detail that conventional small business loan carry a fixed rate of interest. Credit cards with fixed rates, on the other hand, are being switched over to variable rate loans en masse.

  One of the prime movers here is JPMorgan/Chase. Their much heralded new line of business credit cards is arising at a time when Chase has also cut back their Small-Business Loans (backed by the SBA). How much? A staggering 80% fewer business loans this year alone (from 6,100 down to only 1,200). But Chase’s four new credit card lines are all primed up and ready to go.

  Is this an even-up trade? Not by a stretch. Some of these new business credit card lines climb to a steep 30% interest rate. In a nutshell, the new terms using credit cards aren’t near as good as the traditional business loans were.

  Although the credit card loans are more risky then traditional business loans (unsecured vs. SBA backing), banks seem to prefer them. They have much more freedom with variable rate credit card loans. They can change terms and jack interest any time they want. This may soon end, however. Please continue to the next article in this series.

  To be continued...
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