Businesses that depended on credit cards to make purchases and manage monthly cash flow are paying higher interest, having trouble opening new lines or seeing existing ones canceled.
For small-business owners who rely on business credit cards, the recessionary landscape looks extra bleak these days.
OfficeMax Inc. is no longer accepting its own credit cards after the financial company that ran its program and made the loans terminated the arrangement last month. About 100,000 small businesses were affected by the move, the national office supply retailer said.It’s the latest blow to a small-business community still stinging from last month’s cancellation by Advanta Corp. of all its small-business credit cards. The step, taken with little notice after the company wrote off a record cache of loans as uncollectable, took more than 1 million account holders by surprise.
Interest rates are shooting up; Advanta hiked its rates into the 30%-plus range for some cardholders before shutting them off completely. Other card issuers have raised rates and cut credit limits, often with little warning.
At the same time, issuers are requiring higher credit scores for new cards as part of tightened underwriting. Card companies are no longer chasing small businesses with competing deals.“There has been a huge contraction in how aggressively these offers are marketed,” said Curtis Arnold, chief executive of CardRatings.com.
Instead of card solicitations, the mail is more likely to bring bad news.
“Every time I open an envelope, there is a Chase or Advanta or somebody either saying your credit line is cut or interest rate is going up,” said Kirby Newbury, co-owner of DiscountCoffee.com, a 20-employee firm near St. Louis that ships coffee, juice and tea to businesses and consumers nationwide, including a slew of Los Angeles-area entertainment and media firms.
Credit card and home equity loans were two pillars of small-business financing in recent years as home values soared and banks and finance companies competed to win over small firms with 0% interest teaser rates and juicy credit card rewards for office supplies, shipping and gasoline.
Both sources have contracted, with little relief in sight, leaving business operators without tools they used to manage monthly cash flow, streamline accounting and build or maintain business credit.
Office Max is working on offering a new credit product through a different bank in the “near future,” a spokeswoman said. But industry watchers expect the credit card business, struggling with record default rates, to remain stingier with the unsecured loans that credit cards provide.
Advanta’s credit card shutdown was blamed in part on a loan charge-off rate that soared to 16% in the first three months of the year, nearly double some of its competitors’ rates. That compared with Advanta’s level of about 6% in the year-earlier period.
The industrywide rate is growing at a worrisome speed as struggling cardholders fall behind on payments and banks and finance companies try to get loans off their books to limit their exposure to risk. Some estimates show the average charge-off rate hitting 22.5% by the end of 2010.
The rates are the result of several factors, including the difficulty small-business owners are having paying their bills as their sales drop and the loose underwriting standards many card issuers had followed.
Small-business owners are considered by some industry observers to be…