Wednesday, Aug. 06, 2008

Businesses drowning in credit card debt

WASHINGTON -- When Andrew Uribe started building his salsa-making venture, he, like many entrepreneurs, turned to plastic for startup money.

But the business didn't take off as quickly as he had hoped. Now the Ellicott City, Md., entrepreneur has three credit cards that carry a combined $30,000, is behind on his bank loan and has moved out of the industrial space he had leased.

Working out of a commercial space in Baltimore's Lexington Market that friends let him use on weekends, he has the capacity to pack only 1,600 jars of salsa a month instead of 14,000.

His minimum credit card payments run $325 a month, about 15 percent of his total monthly expenses, which he says mainly covers just his interest payments.

"It's horrible because any small profits that I am making, I'm using them to pay the credit cards," the maker of Emy's Salsa Aji, said over the phone from New York, where he was meeting with potential investors. "It's hurry up and pay, and swim or sink."

Entrepreneurs long have used credit cards as quick financing. But with the sputtering economy, tightening credit market and cards' notoriously changing terms, more small-business owners are struggling to pay their debt, accumulated on personal as well as small-business credit cards.

As credit standards loosened at the beginning of the decade, banks expanded their small-business credit card offerings. Compared with the consumer credit card market, the small-business market was virtually untapped, and potentially lucrative, because business credit card use tends to be high volume and paid in full at the end of the month.

The result was a boom: Small businesses will charge 2½ times more this year than when they ran up about $140 billion in 2002, according to estimates from TowerGroup, a financial service research and advisory firm.

But as the economy slowed, so did payments. Major small-business credit card issuers reported a sharp increase in late payments and bad debt over the past year.

And the debt can last long after the business has failed.

Two years after starting Music America Records in Los Angeles, Jeremy Riney, still a college student, knew the record label was going under. He had financed his business with personal credit cards, and he owed around $100,000. When he missed a payment on one, his interest rates jumped from 0 percent to about 30 percent.

"The business was going nowhere, so the only thing I could fund the business with was more credit cards," Riney said. "I just started panicking."

He learned his lesson. He didn't borrow a dime to start his newest venture, music search engine Project Playlist, and earned enough to pay off his old debt within months.

Now credit card issuers are becoming more careful. "The mantra before was bigger is better in the card business. Now (issuers) are becoming much more risk averse," said Brian Riley, research director for bank cards at TowerGroup. "Standards are getting tightened in line with the economy."

But businesses still are finding credit card loans relatively accessible. Over the past year, credit cards were the only source of small-business capital that hadn't dropped off, according to the National Small Business Association's 2008 annual survey. Some 44 percent of small and mid-sized businesses used credit cards for financing, significantly more than any other source.

Business credit cards typically offer more generous terms and, if payments are on time, debt may not show up on owners' personal credit reports, making it easier for them to get additional credit.

Bankruptcy lawyers and community groups say business-related credit card debt is a growing issue.

"It's definitely quite a problem at the moment," said Rob Vickers, senior loan manager at the Latino Economic Development Center in Washington, D.C. "It seems like I'm spending a lot more time helping people come up with a strategy to reduce their debt than to take on more debt."