According to the National Federation of Independent Businesses, 79 percent of small business owners use credit cards as a source of financing. But as access to credit has become more difficult, many are forced to use personal credit for business purposes. Will this trend continue, and why aren’t there more business credit card offerings in the market?
VB: Small business owners are increasingly looking to unsecured credit rather than traditional loans as a faster and more convenient funding mechanism. Credit cards provide free cash flow for almost 45 days, and in addition, they leverage cash back or reward points, which are helpful to offset future business expenses.
But as you mentioned, many businesses still use personal credit cards. I believe this was due to credit tightening during the recession and also the limited business card availability in the market today. The credit tightening was more severe for small business owners and as a result, those owners were forced to use their personal cards.
Secondly, when we look at financial institutions outside of the Top 5 issuers, historically, they haven’t focused on the small business segment. But now, this trend is changing rapidly. In the new world, FIs are more eager to lend and have started to build the right products. If you look at recent studies, they all suggest that small business relationships are more profitable overall, and for FIs, offering a product like credit cards adds to their profitability. Beside interest income, business credit cards deliver superior interchange and fee income which is largely due to attractive features on these cards.
Small business cards are different; they require a different underwriting approach to assess creditworthiness, and also require unique features for the account holder – spending limit controls and more detailed statements. I expect this trend to change and we’ll see more business cards in the market. It’s a win-win for FIs and small businesses.
The Changing Landscape Of Credit | PYMNTS.com
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