Small Business - The Next Credit Victim?
Aug 10th, 2008 | By Rob | Category: credit card debt
Credit cards are a popular source of financing for startup ventures. They don’t require a business plan and they offer readily available credit - either through personal credit cards or business credit cards. A survey by the National Small Business Association found that 44 percent of small and mid-sized businesses are financed through credit cards - the most popular source among those surveyed.
But with the subprime mortgage crisis and spreading credit crunch, as well as the need of banks to de-leverage and efforts by credit card companies to reduce their debt exposure during the economic slowdown could hamper the dreams of entrepreneurs everywhere. And where small businesses are able to garner financing by taking on credit card debt, the policies of credit card companies to increase interest rates based on violation of the terms of the debt (such as missed payments) threatens to make somewhat affordable debt financing for struggling startup companies a crushing debt burden.
A recent Modesto Bee article suggested that “businesses are still finding credit card loans relatively accessible.” But even if that is correct, it’s not clear that the available financing will continue. A similar article on the subject of small business credit card debt in the Philadelphia Inquirer suggested that card issuers are and would continue to cut back on business credit. And some businesses have already found that credit card companies are increasing their use of their right of offset.
If the drying up credit market was the only problem, small business startups could continue based on their current funding. But the slowdown in consumer spending could threaten revenue sources for small businesses at a time when they will need all the cash that they can handle.
The one good piece of news for small businesses is that venture capital funding has remained steady despite difficulties in VC’s achieving their exit strategy because of a weak IPO market and declining stock market. Investment in internet companies is still read hot. And if investors who had money in real estate investments are/were able to get their money out, and if stock market investing / hedge fund performance doesn’t pick back up, more individuals looking for a return on investment may turn to providing small business funding.
Will entrepreneurship be the next victim of the credit crisis? Only time will tell.
