http://www.nytimes.com/2009/06/19/business/smallbusiness/19credit.html?em
By ANDREW MARTIN
Louis Licata has shelved plans to hire three more employees for his Cleveland law firm. Jeannie Macone, of Florida, is cutting back on inventory for her trinket and home décor business. In Ohio, Patrick Allen has slashed employee travel and begun paying cash for work dinners with clients of the marketing firm that he started from scratch.
A crackdown on credit limits by card companies is squeezing the nation's 27 million small businesses, exacerbating the problems brought on by a stagnant economy.
Owning a small business has always been a challenge — half wind up failing within the first few years. But the financial crisis has dealt them a one-two punch, as big banks cut the credit card lines that many entrepreneurs were forced to lean on when a once-abundant supply of loans dried up.
As of April, 59 percent of America's small firms relied on credit cards to help finance their day-to-day operations, up from 44 percent at the end of last year, according to the National Small Business Association.
The number of small-business owners who depend on a credit card to buy items as varied as paper clips and heavy equipment has climbed steadily over the years, from just 16 percent in 1993. Today, that group makes up 11 percent of the revenue for Visa and MasterCard, from 3 percent in 1998, according to David Robertson, who publishes The Nilson Report on the credit card industry.
But credit card terms have worsened sharply with the recession: three-quarters of small business said they have seen a large cut in limits over the last six months. That would not be so bad if other forms of credit were easily accessible. But banks and credit card companies, which opened their coffers when the economy was flourishing, are now pulling back from nearly everything that hints of risk.
"I'm a business in a bad time that wants to expand," said Mr. Licata, who added that he had been unable to get loans at Cleveland's banks since the recession set in. Recently, the limit on three of the credit cards he uses for his law firm was slashed by a total of $60,000, he said, dousing plans to enlarge his business.
Of course, consumers have been squeezed by higher interest rates and reduced credit lines by credit card companies, too. But small businesses were not included in the credit card reform legislation signed into law last month by President Obama, which limits excessive fees and interest rate increases on existing balances starting next year. A bipartisan coalition of senators is seeking to extend the legislation to small business.
"The way that the economy is going to come out of a recession is not by big business hiring but by small business hiring," said Senator Mary L. Landrieu, Democrat of Louisiana, who is championing the measure. Denying small businesses access to credit is having "spiraling" effect on the economy, she added.
Bankers say that credit card companies have no choice but to reduce credit to small businesses. Credit card delinquency among small-business owners is more than 12 percent, roughly two percentage points higher than credit card charge-offs among consumers, according to Mr. Robertson of The Nilson Report.
Kenneth J. Clayton, senior vice president of card policy for the American Bankers Association, said applying the credit card reform law to small businesses would further crimp credit, since it would limit credit card companies' ability to manage risk. Already, he said, the companies have had to restrict credit to small businesses because of rising defaults and uncertainty.
"They are looking very closely at the ability of small business to pay them back," he said. "They have to. They have no choice."
Tom Sclafani, a spokesman for American Express, said credit lines offered when the economy was booming might not be appropriate when growth contracts. The company has been cutting credit lines based in part on the overall debt level of the business.
"What we are trying to do is strike a balance between a customer's spending needs and managing credit risk," he said.
American Express offered the first credit card tailored to small business 20 years ago. Other companies came onto the playing field over the last decade, when a healthy economy turned small businesses into a lucrative source of new accounts as the consumer market became saturated.
Credit card companies became increasingly aggressive in soliciting new business. Many banks began offering their own credit cards to small businesses, in lieu of loans. And many small vendors began preferring, or even requiring, payments with credit cards.
Where small businesses had traditionally relied on bank loans, personal savings or relatives to help pay for their operations, credit cards provided additional flexibility and ease. Low introductory offers and rewards programs were icing on the cake.
The market grew so rapidly that at least one company, Pennsylvania-based Advanta, decided to focus exclusively on credit cards for small-business customers. By 2006, just five years after it was founded, its profit from business credit cards surged 54 percent over the previous year. Eventually, more than one million small businesses took an Advanta card.
Then the economy went into a tailspin, and took Advanta's fortunes with it. The company last month announced that it would no longer pay for additional purchases, leaving many customers in a bind.
Now, small businesses "are really having to scramble because often they don't have the kind of flexibility they had before," said Todd McCracken, president of the National Small Business Association. Further, credit scores of small businesses have been hurt as banks cut credit limits, making it even harder to get other types of credit.
"It feeds on itself," he said.
Mr. Allen, the owner of the financial and insurance marketing firm in Ohio, said he recently took some insurance agents on an Alaska cruise where he tried to charge drinks and several side trips on his credit card, only to be denied. To his astonishment, his limit had been cut with no notice.
After he returned to Ohio, Mr. Allen said he met some clients for dinner. Normally, he said he would have whipped out a credit card to pay the bill. Instead, he paid in cash. Mr. Allen said he has also scaled back travel because credit was tight and business was slower than normal.
"You've got to play a balancing act," Mr. Allen said. "This is going to be a moving target."
Mrs. Macone, the owner of the business in Florida selling equestrian-themed trinkets and home décor to retail outlets, said she had to retool her business in part because the credit lines on her cards were suddenly slashed, even though she maintained she paid her bills on time. Traditionally, she has relied on her credit cards to purchase inventory, which she then paid off as her customers settled their accounts.
But last fall, Ms. Macone, who took out a credit card with Advanta, opened her bill to find the company had raised her interest rate above 30 percent. A short time later, Advanta reduced her spending limit from $30,000 to $5,000. "When you have a business, it's like, '$5,000? Please, what good is that?' "
Advanta said it was responding to worsening conditions. "Across the card industry, card issuers have been increasing interest rates and reducing credit lines to protect themselves against a riskier economic environment," said Amy Holderer, a spokeswoman. "We are no different."
Ms. Macone said she has had to lay off three part-time workers who used to assemble orders for shipment in her warehouse, and cut the hours of two other employees. "I'm the warehouse help now — my husband and I," she said. "I'm back out there picking orders. I haven't picked orders in 10 years."
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