As Credit Lines Fade, Credit Cards Step In

The credit card offers are in the mail.

Just as the slowing economy has made access to cash a higher priority for a lot of small businesses, banks have become more reluctant to extend traditional lines of credit to those businesses, experts say. But banks have been offering “small business” credit cards.

Bank cards and lines of credit both offer money when it is needed, but there is a fundamental difference: lines of credit have low, fixed interest rates or slow-moving, variable ones, while interest rates on credit cards can jump unpredictably.

“Small-business cards have fundamentally replaced lines of credit,” said Alan L. Carsrud, executive director of the Global Entrepreneurship Center at Florida International University in Miami.

Bob Seiwert, head of the Center for Commercial Lending and Business Banking at the American Bankers Association, said he had no hard data but appeared to agree with Mr. Carsrud’s assessment. “People are driven to cards today because bank credit lines are tougher to get” as banks have tightened credit in the last six months or year, he said. “Lenders may adjust card rates and limits as the perceived risk of lending to the borrower increases.”

Entrepreneurs have long used personal credit cards to help bankroll new ventures, said Scott A. Shane, a professor of entrepreneurial studies at Case Western Reserve University.

The small-business cards often differ from personal credit cards in that some offer benefits like product discounts and extended payment terms. But they are identical in critical ways — users are generally liable for revolving balances that grow exponentially as interest rates rise, and lenders may sometimes raise rates and reduce credit limits at any time for any reason.

In a survey in February of 500 owners of small and medium-size businesses, the National Small Business Association, a lobbying group in Washington, found that 28 percent had used bank loans in the previous year, a record low. Forty-four percent said they had used cards to meet capital needs in the previous six months. Fifty-seven percent said their card terms had worsened over the last year.

“I don’t fault banks for charging high interest rates on cards because so many small businesses fail,” said Marilyn Landis, the group’s chairwoman and a 30-year banking veteran. But “small-business owners desperately need the ability to enter contracts with card providers that are predictable, understandable and stable.”

Ms. Landis, who owns a company in Pittsburgh that provides chief financial officer services to growing businesses, spoke from personal experience. She said that her introductory rate on a small-business card had risen to 27.9 percent, from 3.9 percent, after the lender said a mailed payment had arrived one day late.

Stephen Strachan, a flower importer in York, Pa., told members of Congress this spring that rate increases on business and personal cards had forced him to curtail ventures and lay off workers. Mr. Strachan made his remarks at hearings for a bill pending in Congress, the Credit Cardholders’ Bill of Rights.

Beginning in late 2001, Mr. Strachan said, the only new bank credit lines he could find had interest rates higher than those on his personal and business cards. So, he said, he used cards to supplement existing credit lines.

“Card lenders originally offered me very high limits at very attractive rates because of my excellent credit profile,” he said in an interview. “But once I accepted, a couple really turned up the heat.”

In 2003, he said, one bank raised interest rates from as low as 3 percent to as high as 30 percent on four cards with a total balance of about $150,000. The lender cited Mr. Strachan’s rising total debt, and late and missing payments, as the cause. Mr. Strachan said that whenever he had received statements, he had always mailed payments “well before their due date.”

CONTINUED : “I had never missed or been late on any payments”

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