MINNEAPOLIS - Like millions of other small-businessmen when it comes to buying supplies, making travel plans, or reserving a booth at a trade show, Ed Anderson reaches for his credit card.

The chief executive of Lil' Orbits Inc., a Plymouth, Minn.-based maker of the mini-doughnut machines found at state fairs and carnivals nationwide, Mr. Anderson gives five of his 18 employees authority to use the company's credit cards.

He has Visa, MasterCard, and American Express but prefers the latter because it gives him an airline travel mile for each dollar charged.

"We use it for everything," he says. "It makes our record keeping easier, and since my wife and I still own the business, we get the miles."

Along the way, Mr. Anderson reckons, his company, with about $10 million of annual sales, racks up about a quarter of a million dollars in charges on his cards each year.

It may not be the biggest segment of the credit card industry, but the small business market is one of the fastest-growing and among the most lucrative.

American Express Co. has more than one million cards in the market. MasterCard estimates it has 1.2 million BusinessCards in the hands of entrepreneurs, and Visa Business expects to near that number by yearend. Combined, the two associations had nearly $2 billion of small business outstandings last year.

Both numbers are certain to grow as bankers increasingly see the product as critical to their small business banking programs. Experts cite two reasons: The cards could be a more cost-effective way to serve the micro- loan market, and they are more lucrative than the consumer-oriented cards that some entrepreneurs now reach for.

"It is definitely more profitable than the typical credit card," said Elizabeth Brett, director of marketing for the MasterCard BusinessCard. For example, average purchases and revolving balances are higher, the card carries a yearly fee, and fraud losses have been lower than with consumer cards.

Business cards are also a way to serve small credit needs more cheaply. In a 1993 study, Visa Business compared the average expenses of a traditional commercial loan with those of using one its business cards. The findings (see graphic) showed that the Visa Business loan would cost $293.76, or 75% less than a term loan.

At Norwest Corp., officials say that small-business customers are increasingly turning to credit card-based lines of credit. "It's easier for them to qualify," said Jim Quinlan, vice president for commercial banking at the Minneapolis-based superregional.

One study found that 26% of small businesses that apply for credit are rejected. In response, Visa has compiled a pooled scorecard of businesses in an effort to bring consumer-style efficiencies to risk analysis for small business cards.

"It should help banks move into the 21st century of credit underwriting for small business," says Robert Levaro, senior vice president of commercial card products at Visa.

For now, banks are satisfied to focus on the vibrancy of the small business market and its untapped potential. Visa estimates that such companies spend more than $170 billion annually on goods, services, and travel and entertainment - which is more than the totals for midsize businesses or large corporations.

"It's obviously an area with great numbers," says Kathryn Marinello, senior vice president of First Data Corp.'s card services group in Omaha. "The economy is growing, and there's general acknowledgement that small business has been the engine."

Those small companies are turning to credit cards for their procurement and travel and entertainment needs as never before. Among the most significant trends: the use of credit cards by small businesses as revolving lines of credit and a slow but steady breakdown of the traditional barriers between procurement and T&E cards.

Sometimes, the credit card is an add-on to existing services. Other times, it is the hook that brings them in. Mostly, customers seem to like the card because they can get credit quickly and without the hassle of filling out lots of paper.

"It's a way of locking that small business into the bank and starting a credit relationship with them," says Visa's Mr. Levaro.

According to a 1994 study by Arthur Andersen's Enterprise Group, more than 40% of small-business owners have made commercial purchases on their personal credit cards. And 47% of start-ups use personal credit cards for financing needs.

With laws offering greater protection to personal cards, Mr. Levaro says, it takes a strong "suite of business-related services" to draw small companies to business cards. The trick is figuring out what works, and what merely costs.

Small-business customers are demanding and sophisticated in their needs. But officials say that they also are accustomed to paying for good service, opening the door to profitable fee-generating and lending relationships.

Among the biggest draws are frequent-flier miles. Phil Skarston, vice president of marketing for ProCard Inc., tells of a friend who runs a small mortgage house. "He charges major capital expenditures on his card to get the miles."

A growing array of other enhancements, with varying costs to issuers, are also attracting users to business credit cards.

They include basics, such as collision/damage waiver protection on car rentals and lost luggage insurance - and more business-oriented offerings, which can be even more attractive, depending on the client's needs.

One example is MasterCard's terminated-employee liability insurance, which covers up to $5,000 per cardholder of expenses charged by a disgruntled worker gone berserk.

"The banks do not take the risks if there is employee misuse," says MasterCard's Ms. Brett; "that risk comes back to us."

The cards increasingly come with a full menu of discounts on everything from hotel rooms to supplies. This year, American Express Small Business Services began offering 3% discounts to card users who charge their gasoline purchases at Mobil service stations.

But for many, the biggest draw is the record keeping ability that comes with regular statements and increasingly sophisticated software options.

"The most attractive thing to small business is reporting, which can help them reconcile their business at the end of the month," asserts Mr. Skarston of ProCard, a provider of procurement technology and consulting.

First Data's Ms. Marinello agrees, adding: "A lot of companies are using cards to streamline purchasing . . . and not worry about processing paperwork."

Until last week, Ms. Marinello was president of FBS Card Services, a subsidiary of Minneapolis-based First Bank System Inc. FBS, the nation's largest issuer of corporate cards, offers several products geared to small businesses. One features specialized reporting; another offers centrally billed travel accounts. One getting more attention sports a revolving credit line.

"It depends on the needs of the customer," Ms. Marinello says.

Perhaps the biggest myth of business credit cards is that their primary use is for T&E. Visa estimates that only 40% of expenditures on its small business cards go to that purpose.

"Fewer than 40% of our cardholders get on an airplane more than once a year," says Mr. Levaro. "The rest (of the spending) is procurement - office supplies, computers, etcetera."

The convergence of the two areas poses a potential problem both for the two big credit card associations and for banks, which have traditionally marketed separate cards for procurement and T&E.

The fact is, they have little control over how those cards are used, and increasingly, businesses are just putting everything on the same card, explains Mr. Skarston.

A recent study commissioned by ProCard found that 60% of businesses want to put procurement and T&E spending on the same card.

Therein lies the problem. The associations want customer wallets filled with as many of their cards as possible, while some banks worry about the discount rate they receive from the associations.

Today, says Mr. Skarston, who worked for Visa for 10 years before joining ProCard, card issuers receive a blended rate of about 1.54% from the associations to help cover risk on procurement cards, while the number rises as high as 1.7% for T&E cards. Combining the two would likely reduce the overall rate banks are paid.

But that may be the price of growth as banks market the business cards to growing numbers of small-business customers.

"Some customers will want an all-in-one card to do everything, and we'll have to provide it," says one midwestern banker. "Others will want the cards as we know (them) today.

"I think the customer will get there before the banks do. Today, we still see them as segregated, and most of my colleagues haven't even begun to see the credit card as anything more than just another product."

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