Small businesses should be treated differently under credit card law

By Vicki Needham - 06/01/10 07:30 PM ET

Congress should proceed with caution when considering any legislation that might effect the availability of credit for small businesses, according to a recent report by the Federal Reserve.

Before applying certain provisions designed to protect consumers to small businesses credit cards, lawmakers would need to "recognize the potential for adverse effects on the cost and availability," of those cards, according to the report.

Kenneth Clayton, senior vice president and general counsel for the American Bankers Association, applauded the report on Tuesday, saying it "recognizes the vital role that credit cards play as both short-term financing and borrowing tool for small businesses."

"What is clear is that small businesses will lose access to small business credit cards if lenders are restricted in their flexibility to manage risk," he said. "That would be a terrible blow to small businesses nationwide as they seek to stabilize their operations, grow their business and hire new employees. The potential must be of paramount consideration to any effort to regulate small business cards."

Credit card issuers could have more difficulty assessing the creditworthiness of small businesses than of consumers, restricting issuers' ability to adjust interest rates, possibly leading to higher initial interest rates, which would harm those firms that borrow on small business credit cards, the report found. Or if credit card issuers were to reduce credit limits in response to such restrictions, even those businesses that use credit cards for transactions and cash management would be harmed.

"It is not apparent that the potential benefits of applying substantive restrictions similar to those in TILA (Trust in Lending Act) to small business cards outweigh the risk of increased cost and reduced credit card availability for small businesses," the report said.

At the end of 2009, 83 percent of small businesses used credit cards, 64 percent used small business cards and 41 percent used personal cards. Despite the widespread use of cards, only 18 percent of businesses reported borrowing on the cards, 12 percent of those holding small business cards and 12 percent on personal cards, according to the report.

All told, credit card debt represents a very small percentage of total debt held by small business owners to finance their operations.