Instead of relying on credit lines to make payroll or cover short-term operating expenses, a growing number of small businesses are using credit cards to fund cash flow. The Miami Herald recently published an article quoting the dangers of this approach from various university sources. They also reported that according to the National Small Business Association only 28% of small businesses sought loans from banks during the prior twelve months.
The biggest problem that small business owners might not be aware of is teaser rates charged by credit card companies. A teaser rate is used to lure prospective card holders by offering a promotional or introductory interest rate on purchases or transfers for a period of time (e.g. 6 months). After the teaser rate expires, an account holder's interest rate changes to a regular interest rate, which can rise in some cases from 0% to as high as 18%. Teaser rates became wildly popular during the recent mortgage boom and bust when adjustable ARM rates were offered to potential home buyers. A large reason for the sub-prime mortgage crisis is attributed to customers who couldn't make their mortgage payments after their interest rates adjusted from the introductory ARM to the regular rate.
American Express OPEN recently published the results of a 602 respondent survey in which 63% of small businesses reported being impacted by the tightening of credit versus 50% in August. Not only do small businesses risk paying more in interest due to using their credit cards to finance operations versus lines of credit, but in most cases, small business card holders personally guarantee their business credit cards which can have an adverse effect on their credit scores.
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