The improving economy has presented new lending opportunities for financial institutions, which are using business credit cards to broaden relationship with small business owners while generating attractive returns on assets.
Small business owners are increasingly looking to unsecured credit, rather than traditional loans, as a faster and more convenient funding mechanism. Business credit cards enable small businesses to better manage cash position and expenses, to enjoy additional purchasing power through rewards offerings, and to benefit from real-time access to cardholder activity.
Since they first arrived on the scene about 20 years ago, the use of small business credit cards have increased dramatically. In a 2013 report, Mercator Advisory Group estimates that $6 of every $10 of small commercial and industrial loans is generated by business cards, and expects that as demand for credit increases, business cards will benefit. Consider that 79% of small business owners use credit cards as a source of financing, according to the National Federation of Independent Businesses.
While credit card use may be common among businesses, there is still significant potential for growth in small business card adoption and use, thanks in part to current economic conditions and a 49% increase in the number of small businesses since 1990, as reported by the Small Business Administration. As access to credit tightened in recent years, many small businesses were forced to use personal credit for business purposes. This trend has created an unmet need in the credit market, which can be filled by a small business credit card offering.
Only the largest financial institutions once offered small business credit cards, leaving business owners with few options. Today, financial institutions of all sizes are using this business tool to build broader relationships, encourage greater loyalty and establish an ongoing dialogue with small business owners. Small business credit cards also enhance cross-selling opportunities and greater adoption of more services, resulting in longer, stickier and more profitable relationships.
Typically, small businesses have multiple cards per account, and use them as a credit line to extend cash flow, resulting in more high-volume purchases and greater spending. Because financial institutions can potentially leverage existing consumer infrastructure, many will experience reduced operating costs and improved risk management measurements for small business credit cards. Congress exempted business credit cards from the Credit Card Accountability Responsibility and Disclosure Act of 2009, better known as the CARD Act.
With consumer credit cards now more tightly regulated than business cards, small business credit cards present an opportunity for financial institutions to increase their non-interest income and improve revenue streams in two ways. First, interchange income is higher on commercial bank identification numbers than on consumer BINs, and second, business credit cards can command higher fees than those typically expected or permitted on consumer cards. The fee structure is a reflection of the enhanced capabilities available with a small business credit card, such as rewards programs, monitoring and reporting features, and customizable limits on spending and expenses.
Business credit cards can serve as a borrowing mechanism for small businesses, whether in the absence of, or in addition to, traditional loans and lines of credit, in addition to improving cash management. The cash flow issues that stem from aging receivables can be mitigated to some degree by making purchases with a small business credit card instead of a check.
By aggregating monthly expenses and taking advantage of the typical 30-day billing cycle for credit cards, businesses can delay paying for a purchase for as long as 45 days in some instances, or even choose to pay over time. And, many cards offer a grace period during which no interest is assessed, making it possible for the business owner to use the card as a short-term, interest-free borrowing mechanism.
Given the current economy, its likely most small business owners will continue to keep a tight rein on expenses. Robust small business card offerings provide features that enable business owners to track and monitor expenses with an eye toward controlling costs and ensuring employees only use the card for business spending.
Various card products enable the business owner or other authorized user to view card activity online 24/7, restrict card use to certain expense types and set customizable spending limits by individual employee. Business cards also typically come with rewards, which can be a powerful benefit for small business owners who want to invest back in the business or earn additional purchasing power.
To enhance their relationships with small business accountholders and attract new business customers, financial institutions need business credit card solutions that directly respond to the specialized needs of small businesses. A small business card will require a different underwriting approach to accurately assess the creditworthiness of the company, for instance, and may also require unique features and services expected by the accountholder, such as customizable spending limits and more detailed statements that categorize expenses. Its important to maintain pricing flexibility to ensure adequate coverage of the cost of capital and compensation for the level of credit risk posed by each business customer.
Expect the tools that help small businesses manage and control expenses and ease cash flow constraint to remain in high demand for the foreseeable future. For example, a self-service online portal enables the small business owner to manage and administer the account, providing greater convenience and control while reducing administrative work and costs for the financial institution. This self-service feature, normally reserved for the largest financial institutions, is now accessible to any size bank or credit union and their full range of business accounts. Keep in mind, small business credit card solutions are most effective when used in tandem with a robust member rewards offering, enabling business owners to accumulate rewards based on increased card usage and spending levels.
Vikas Bansal is vice president and credit product leader for Fiserv.