Small firms are finding it increasingly difficult to secure affordable financing in the current economic climate. Testifying in April before the House of Representa-tives? Committee on Small Business, small-business owners told lawmakers that they are turning more to credit cards to finance their businesses as traditional sources of capital, including loans from the U.S. Small Business Administration, diminish.
Their testimony was part of a hearing on the role of credit cards in the financing of small firms, held on April 3, in the run-up to National Small Business Week, from April 21 to 25. The country?s estimated 25.8 million small businesses account for 50 percent of the nonfarm gross domestic product and create 60 percent to 80 percent of new jobs, according to the SBA. Lawmakers worry that many of these businesses may not be able to withstand today?s harsh conditions.
?When a small firm can?t buy equipment or has to lay off its workers, our entire economy suffers,? says Nydia M. Vel?zquez, the house committee?s chairwoman. ?These businesses are the principal drivers of our economic growth, but without capital they can?t lead us back to recovery.?
According to a background committee report, 65 percent of respondents in a recent Federal Reserve survey of senior loan officers reported tightening lending standards in the first quarter of 2008. The impact of this move is compounded by federal loan programs, such as the SBA?s flagship 7(a) initiative, which are increasing fees and making it more difficult for entrepreneurs to get financing, the report said.
The 7(a) program provides loans of up to $2 million to small businesses unable to secure financing on reasonable terms through conventional credit channels. It operates through private-sector lenders that make loans backed, or guaranteed, by the SBA in the case of default.
?With fewer options in the private market and in the midst of an economic downturn, it is inexcusable for SBA to make it tougher for small firms to get capital,? Vel?zquez says. ?Affordable financing means access to opportunity.? No one understands that better than a small-business owner. That?s why many are turning to plastic to keep their businesses and our economy going.?
Credit-card use by small firms has increased 14 percent in the past five years alone, but 70 percent of small businesses pay off their full balance each month, the committee reports. ?That gives businessowners the equivalent of thirty-day interest-free loans, which makes charging purchases all the more practical,? it says.
In a recent column for MarketWatch, Marshal Loeb, former editor of Fortune magazine, notes that while credit cards are a ready source of funding, using plastic for business purposes can be quite expensive because the interest rates are higher than for other types of borrowing. Recently, the average for fixed-rate standard credit cards was 13.42 percent, according to Bankrate.com, he says. ?Particularly dicey are teaser cards, which start out at a low rate and spike significantly within six months or so,? Loeb says in his article titled ?Six Ideas for Financing a New Business.?
The five additional potential sources for seed money, he says, are personal assets ? money held in a bank account, money-market fund or brokerage account, for example; a home-equity loan or line of credit, which generally carry lower interest rates than other forms of borrowing (in early March 2008, a $50,000 home-equity line of credit had an average variable interest rate of 5.18 percent); family and friends; peer-to-peer lending (Web sites like LendingClub.com and Prosper.com bring individual borrowers and lenders together); and SBA, including SBA Express loans for up to $350,000 and Patriot Express loans for veterans and their spouses, for up to $500,000.