LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

January 17, 1999 Sunday 2D EDITION

SECTION: BUSINESS; Pg. K-01

LENGTH: 1161 words

HEADLINE: Credit cards bankrolling small firms More businesses tap into such financing sources

BYLINE: By Robert Schwab, Denver Post Business Writer

BODY:
For the first time in the seven years that Arthur Andersen and a small-business lobbying group have surveyed small businesses, more owners are using credit cards to finance operations than those using bank loans.

The 1998 survey, completed in October and released in November, shows 47 percent of 504 small businesses owners who responded said they used credit cards to finance their operations during the previous 12 months compared with 45 percent of those who used bank loans.

Businesses could have used both methods, but it was the first time credit cards topped the survey, sponsored by National Small Business United and Arthur Anderson's Enterprise Group. Last year, only 34 percent said they used cards to finance operations. Denver-area business owners say using their cards to keep afloat is common practice, though a fraction of them end up filing bankruptcy to bail themselves out of debt.

Todd McCracken, president of National Small Business United, which represents about 65,000 members that average about 12 employees each, said he is concerned about a potential rise in debt that could lead to bankruptcy among small businesses.

The survey showed that more small business owners in 1998 said they had carried over year-end balances on their credit cards than did in 1997.

"If that trend continues," said McCracken, "it could be very bothersome because it shows that small businesses are going into debt, and if the economy turns south, the bankruptcy issue could become significant."

Congress may address that issue as it reconsiders legislation that could keep some business owners from using bankruptcy to escape piled up credit-card debt. Credit-card companies have pushed for the reform, which would force some bankruptcy filers into payout plans on debt that could include credit-card balances.

Credit-card balances are now considered unsecured debt, and card companies are put among the last in line for repayment behind a bankrupt business owner's secured creditors, those who have collateral.

The card companies "say they are having too hard a time collecting bad debt," said McCracken.

One Denver-area business owner who filed for personal bankruptcy Dec. 31 with $ 87,000 in credit-card debt said she did so only because her credit-card companies suddenly started demanding higher interest rates from her, citing the number and size of her outstanding credit-card balances.

The woman - who asked not to be named because she's embarrassed by her financial position, though she has done nothing illegal and she said she's been living and running her business without her credit cards for four months - said she was advised to make the filing by both her attorney, her accountant and other business acquaintances.

She's not the only business owner locally to have followed such advice, yet many others use their cards and pay them down successfully. Ed Gillespie, a Washington spokesman for a coalition of creditors lobbying to reform the nation's bankruptcy laws, said just 1 percent of credit-card holders file bankruptcy, yet all bankruptcies cost creditors $ 40 billion in debt that is written off those companies' books each year.

Margot Langstaff, a Denver-area business owner, said she's pushed her own credit-card balances to as much as $ 100,000 to finance her Internet-based financial consulting company, Oyster Communications.

"Absolutely, and I continue to," said Langstaff, adding that she knows of many companies that regularly use credit cards to provide short-term, on-demand financing.

She said her own balances "were easily paid down" after she used credit to finance printing jobs done to fulfill contracts with a client before the client made payment.

"You can line up the number of small businesses out there who do the same," she said.

The business owner who filed bankruptcy said she has always considered her credit card "my best friend" through 20 years of being in business, and once, after a bad experience with potential investors in her company, she told them she already had two investors who were "always there for me up to a limit: Mr. Visa and Mr. Mastercard."

But McCracken and most other business advisers, including Langstaff, who has published a catalog of sources of small-business financing, always warn, too, of the dangers of overextending your company.

Two companies that had extended credit to the bankrupt business owner, GM and Wells Fargo, failed to respond to a request for comment on the practice of increasing credit-card rates for cardholders with numerous high balances - making it that much more difficult to pay off the total debt.

But a spokeswoman for Wells Fargo corporate communications said she wasn't surprised by her company's reaction, especially since people who are higher credit risks often are asked to pay higher rates on borrowed money.

Washington small-business experts who track legislation expect the new Congress will be asked again to consider the bankruptcy reforms that could put credit-card companies into the line of creditors that a bankrupt business owner will be required to repay.

"Better than a 50 percent chance," said McCracken.

He and other small business advocates, including Tim Jackson, director of the Colorado office of the National Federation of Independent Business, note that the "good news" in recent surveys of small business owners is that many are finding many more sources of financing than ever before.

The Arthur Anderson/National Business United survey showed that 81 percent of small and mid-sized businesses surveyed indicated "they were able to obtain adequate financing for their business" - up slightly from 76 percent who said that in 1997.

That would suggest, at least for the general small-business population, that a longtime complaint of small business owners - being cut off from access to capital - is finding some resolution in the marketplace.

During the ongoing economic boom of the 1990s, more and more business financiers, from banks to angel investors, have increasingly sought out investments rather than the other way around: businesses seeking lenders.

Credit-card companies, from American Express to Visa and MasterCard, have been aggressive among the firms looking to find businesses interested in borrowing their money. Cards cater to businesses

Small-business experts and small-business owners themselves offer a multitude of reasons for the surge in credit-card use. Among them:

Newly aggressive marketing of credit cards to small-business owners.

The ease of getting credit cards as opposed to obtaining a bank loan or other, more traditional forms of financing.

The sometimes shockingly low "introductory" rates on credit cards for new takers.

The sheer growth in the number of small-business start-ups, such as home-based enterprises, that want to borrow several thousand dollars - an amount that doesn't really interest many commercial lenders.

- The Dallas Morning News

GRAPHIC: PHOTO: The Denver Post/Andy Cross Small-business owner Margot Langstaff pays for office supplies with a credit card at the downtown Office Depot. Langstaff says she's pushed her credit-card balances to as much as $ 100,000. The Denver Post Small business goes plastic

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