Fed Report on Small Business Credit Cards: More of the Same?

The Fed sided with banks and other credit issuers. So begins a recent FoxBusiness newsstory describing the findings of a new study weighing the need for business credit card reform. In case you missed it, here’s a quick summary:

Who/What: The Federal Reserve has released its Report to the Congress on the Use of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses.

Why: The study was mandated by the Credit CARD Act that protects consumers against retroactive rate hikes and unfair billing practices, among other things. That law does not apply to business credit cards. In general, Truth In Lending Act protections do not apply to small business cards (except for protections against unsolicited cards and liability limits for fraudulent use).

What the Fed found: While a large majority of small businesses use credit cards (83%), many fewer carry balances (18%). Small business loss rates are generally 20 – 30% higher than that for personal credit cards, and they often require higher credit lines.

The study also described how many small businesses are getting rejected for small business loans, but the majority (nearly 75%) are still being approved for credit cards. In the end, it looks like what won out was the fear that these loans of less resort may be harder to get.

The study concluded that the benefits of extending CARD Act protections outweigh the risks of a reduction in credit availability.  It's worth noting, though, that Bank of America announced earlier this year that it would voluntarily extend many of the CARD Act protections to its small business credit cards.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

Social Networking Meets Small Business Credit Ratings

Last year, a friend called me asking for advice. Her coaching and consulting firm was stiffed for a couple grand by another business. The firm that didn't pay her for her services was located across the country, so there was a good chance that any money she spent trying to collect would be a matter of throwing good money after bad.

“Can’t I report them to the credit bureaus?” she asked. “Probably not,” was my response. The credit reporting agencies are set up to collect large volumes of information from established clients, not one-time reports like hers.

Today, my answer to her would be different.

That’s because Cortera, a community-driven business information company, has unveiled the Cortera Credit Exchange, a new online service that, for the first time, blends business credit report data with user-generated payment experience reviews and ratings from companies’ business partners.

That means my friend could report the payment history of her customer who didn’t pay -- for free. Just as importantly, she could also report the payment history of customers who do pay her on time, thereby helping them build better credit ratings.

Cortera’s press release says, “Small businesses will now be able to share payment information with their peers to make the informed decisions necessary to manage credit risk, attract favorable payment terms, optimize cash flow, and capitalize on an economic recovery.”

These days, many small businesses can't afford to write off debts from customers who don't pay. That makes business credit ratings more relevant than ever. If you are a small business owner, check it out and let us know what you think.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis