More small businesses are embracing commercial credit cards, and issuers are busy introducing new products for them.

Some established issuers of small-business cards-such as American Express Co., Advanta Corp., and Chase Manhattan Corp.-have begun offering new features, such as frequent-flier rewards or low interest rates.

Other issuers-such as MBNA Corp. and the First USA division of Bank One Corp.-are entering the market because they smell profits.

Small businesses are only a tiny part of the card industry's customer base, because their accounts have traditionally produced low returns. But the situation is changing as these businesses turn toward cards as financing tools. Mounting survey evidence suggests that revolving cards for entrepreneurs could produce new revenue for issuers.

Saturation in the consumer card market is also reshaping issuers' attitudes, making small-business cards more attractive. The nation's 23 million small businesses use plastic for only about 2% to 3% of their spending, American Express estimates.

"As traditional consumer issuers have seen margins dwindle, they're looking for other markets where there's less competition," said Michael Noles, senior vice president and general manager for Advanta Business Cards in Voorhees, N.J. "This clearly stands out as one."

Advanta kept its 300,000 small business customers when it sold its consumer card portfolio to Fleet Financial Group last year. Next month Advanta plans to launch a card that would let small businesses accumulate air-mile points.

The sector is "a very good market," Mr. Noles said. "You've got small businesses that need credit and also need a transaction device to make purchases easy for them. You get a nice mix of interchange income, as well as interest income."

Citigroup has been sending more solicitations to small businesses through its AT&T Universal Card division. The Citibank cards group has also been touting a new small-business platinum card.

As the platinum product shows, small-business cards are coming to resemble their consumer cousins more closely. A far cry from the vanilla commercial card of yore, the Citibank platinum offers American Airlines mileage points, discounts on computer equipment and rental cars, and free annual reports. The card comes with a $75 annual fee.

Les Dinkin, a director at the New York consulting firm Oliver Wyman & Co., is among several industry advisers who say small-business credit cards represent "a major untapped opportunity."

"Most small-business spending is done with checks and cash," he said. "The importance of these companies is misunderstood and underappreciated."

According to Mr. Dinkin's research, small businesses account for $275 billion a year in charge volume, $75 billion of it done on personal cards rather than commercial ones.

The number of small businesses using commercial credit has doubled in the past five years as cards have taken the place of traditional loans, Mr. Dinkin said. But only 35% of this market uses a commercial card, "so there's tremendous room for growth."

American Express, which offers both revolving and nonrevolving cards to small businesses, controls about half of the accounts in this market, Mr. Dinkin said. "Clearly they've been doing something right-and banks have been letting them."

American Express has increased product offerings for small businesses from two cards to seven in the last three years. It has also begun offering frills, like tying the cards to its Membership Rewards program.

American Express calls the recent entry of the monolines into the business card sector "a serious force to be reckoned with."

"This is a robust market opportunity" that other issuers are just starting to recognize, said Steven W. Alesio, president of small-business services at American Express in New York.

Small-business cards account for 16% of American Express' card revenues, the company said. Its small-business card users spend 1.7 times more than consumer charge card customers.

Until recently, community banks were American Express' major competitors in this realm. Today, "national players are coming onto the competitive scene," Mr. Alesio said. "We think our success is attracting" them.

Compared to the consumer card business, the economics of small-business cards is "very favorable," Mr. Dinkin said. Revenues from annual fees and interchange are higher, he said, and chargeoffs are lower.

Robert K. Hammer, chief executive officer of R.K. Hammer Investment Bankers in Thousand Oaks, Calif., said revolving small-business accounts generate more revenue per account-$155 a year, on average-than nonrevolving travel and entertainment cards ($141 a year).

Mr. Hammer said issuers should stop viewing small-business accounts as marginally profitable and start realizing that "there are a lot of entrepreneurs-I mean millions-who depend on lines of credit to normalize the seasonal spikes and valleys in their cash flow.

"Most businesses today are small businesses-they're not the Microsofts and Sun Microsystems-and those people are not all funded by cash from savings."

As small businesses gain respect in the card market, they are also getting more choices. Advanta, for example, is "already in the midst of differentiating the product that we offer to small business customers, depending on their needs," Mr. Noles said. New customers will get different offers from longtime ones.

By yearend Advanta will offer "at least three or four distinctly different products" for this segment, he said.

Chase Manhattan, which introduced a small-business debit card last March, brought out two new small-business credit cards last week.

Both are offered as either MasterCard or Visa. One card has an annual fee of $50 and an interest rate of 14.99%; the other has no annual fee, but an interest rate of 19.9%.

Chase Manhattan is also considering cobranded cards for small businesses, and cards that bear rewards.

But Chase is less exuberant about the market than others in the industry. The bank has been in this line of business for more than five years, but "not as many small businesses as we would like" are using the credit cards, said Leonard Walker, senior vice president of small business financial services at Chase.

The debit card business has been brisk among small business customers, Mr. Walker said, but "I wouldn't say I've seen a shift from traditional loans to credit cards."

Rather, Chase is pursuing product differentiation to meet customer needs and stay ahead of the pack. "Competition is picking up every day" in this sector, Mr. Walker said. "Banks as well as the monolines are in the game today."

A late-1998 survey of 504 entrepreneurs found that 47% had used credit cards for financing their businesses in the previous 12 months, up from 24% in the 1996 survey. The new figures show that more business owners financed with cards than with commercial bank loans (45%), leasing (36%), or vendor credit (19%).

Many of the respondents to the survey, conducted by National Small Business United and Arthur Andersen's enterprise group, were using their personal credit cards. That suggests a major opportunity for issuers to market specialized corporate cards.

Mr. Dinkin said a bank that captured 5% of the small-business card market could generate pretax profits of more than $600 million.

'We don't think people really understand the size and the economics of the business," Mr. Dinkin said. "They don't really understand how profitable it is."

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