Small Business Growth Being Hampered By Regulatory Disparity

Everyone agrees that small business is the backbone of the economy, including Federal Reserve Chair Janet L. Yellen, who recently credited small business owners with much of the …

Everyone agrees that small business is the backbone of the economy, including Federal Reserve Chair Janet L. Yellen, who recently credited small business owners with much of the economy’s recovery to date as well as much of the work that remains to be done.

“America has come a long way since the dark days of the financial crisis, and small businesses deserve a considerable share of the credit for the investment and hiring that have brought that progress,” she said in a May 15 speech at the U.S. Chamber of Commerce. “Although we have come far, it is also true that we have further to go to achieve a healthy economy, and I am certain that small businesses will continue to play a critical role in reaching that objective.”

The sentiment is clearly justified, as small businesses have accounted for roughly 60% of all the new jobs created in the past 20 years, according to statistics from the U.S. Small Business Administration, and more than half of the new jobs since employment numbers turned north in 2010, according to the U.S. Department of Labor. The problem is, small business owners are operating with one hand tied behind their backs due to a credit card industry regulatory disparity that is putting downward pressure on business expansion. 

Small business credit cards are not covered by the landmark Credit CARD Act of 2009, despite there being no fundamental difference between cards branded for consumer or small business use. Business owners are still held personally liable for unpaid balances and typically have account information reported to their personal credit reports. That’s important for a number of reasons, chief among them being the fact that more than 30% of small business owners use credit cards as their primary financing vehicle and one of the CARD Act’s key protections is a prohibition against arbitrary interest rate increases on existing balances. 

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In other words, issuers cannot raise interest rates on consumer credit card balances unless a cardholder is at least 60 days delinquent on payment. They can still do so whenever they want with a business credit card.

The result is an environment in which small business owners can never say for sure how much their debt will cost from one day to the next. Interest rates could increase in the face of rising costs for the issuing institution or just because a bank executive is having a bad day. Either could be enough to derail carefully laid business development plans or to force bankruptcy during tough times.

Such dynamics obviously do not lend themselves to hiring or growth, which means they are decidedly bad for business and the economy. 

The good news is that a few forward-thinking credit card issuers – led by Bank of America – have extended certain CARD Act protections to their small business card offers. Bank of America is the only one that has extended the rule against arbitrary cost of debt increases, however, which means small business owners are best served revolving company debt on a BofA business card or one of the various 0% credit cards currently available on the consumer credit card market.

The bad news is that none of the other major issuers have extended any new CARD Act protections to their small business cards in the past two years. It would therefore seem that small business owners are being left behind as our post-recession emphasis on overhauling the credit card market fades.

That is certainly an issue that merits attention moving forward.

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