If you search for quotes about borrowing, you’ll find a sea of observations about its ills. But then there’s Stephen Moore, an economist, author, and senior visiting fellow at The Heritage Foundation. He takes a more nuanced view of debt: “Borrowing isn’t inherently bad; it depends a lot on what the debt is financing.”A rising number of small and medium-sized businesses (SMBs) are starting to rack up large credit card debts, with many of those using credit cards to cover operating expenses. This could be a warning sign of growing financial stress among small businesses.Struggling small businesses are twice as likely as healthy businesses not to pay off their monthly credit card balance in full, according to a J.D. Power survey. By relying on credit cards to pay operational expenses, these companies find themselves accruing debt with high interest rates. Of small businesses that are heavy users of credit cards, 63% were deemed financially unhealthy, according to J.D. Power.Paying off credit card debt each month helps stronger businesses thrive. Businesses with mounting credit card debt may feel they have no choice but to keep charging: they are likely not generating enough cash flow to pay operating expenses and may feel their only option is to use credit cards. However, there may be other options, and community financial institutions (CFIs) can play a role in helping these businesses — even ones that have trouble qualifying for more traditional business loans.On the other hand, many strong businesses are robust users of credit cards but pay off their balances. They find the convenience of credit cards useful, and they appreciate loyalty programs that allow them to earn cash back or travel benefits that can help reduce overall spending. How CFIs Can Help SMBs with DebtCFIs have a number of opportunities to help these businesses with their cash flow and rising debt, through both traditional banking services and some more creative solutions. Here are some options for small businesses:
- BNPL. Buy Now, Pay Later is generally viewed as a consumer option but it can work for small businesses as well. Struggling small businesses can use BNPL advances to cover immediate spending needs. These plans require payment in installments over time and charge fees but not interest, which can make them cheaper than credit card debt. However, a business must be sure it can make the required payments over a few months. Missing a payment can damage credit ratings. Some financial institutions have been slow to adopt BNPL services for consumer purchases, but small business uses may be more advantageous for customers of CFIs.
- Tailored credit options. These personalized solutions offer SMBs flexible terms, industry-focused solutions, and advisory services to help them plan for their unique needs. For instance, if you’re working with a seasonal business, they may need funds to get their business up and running each year, yet may need to make smaller debt payments during their off season.
- Inclusive lending programs. Small businesses that carry hefty credit card debt are often owned by minorities, women, or other protected groups who have difficulty accessing traditional sources of business credit. Banks can establish Special Purpose Credit Programs that are allowed to extend credit to targeted groups of borrowers and offer advantages like lower down payments, lower required credit scores, and discounted interest rates. For example, Zion’s Bank Special Purpose Credit Program called Lift Local has provided $153MM in loans to more than 2K businesses owned by minorities, women, and veterans since its launch in 2020.
- SMB debt counseling. SMBs that struggle and carry expensive credit card balances could be helped by credit counseling. Again, credit counseling is often thought of as a service for consumers, but it can also be useful for strapped SMBs. CFIs should already be cultivating close relationships with their SMB customers and should be alert to signs of burdensome credit card debt. Bank relationship managers can offer counseling on managing that debt or refer business owners to outside credit counselors. The Small Business Administration also offers help to SMBS in managing finances through local Small Business Development Centers. These SBDCs can also provide referrals for outside credit counseling.
- Innovative financing products. New tech companies that offer business loans have altered the business lending landscape. They offer streamlined, online loan applications with quick turnaround. Too many banks still rely on clunky old application processes that are slow and adhere to very strict approval guidelines that emerging new small businesses find cumbersome and difficult to navigate. But there are faster tech solutions that banks can use, often by partnering with a tech provider. There are also alternate ways of assessing creditworthiness that can help some small business owners pass muster on applications. For example, Seattle Bank partnered with a fintech to offer simplified small business loan applications that can be completed in as little as 10 minutes and reach a decision in a matter of days instead of weeks.
Credit card debt is an expensive way to run a small business, but its use is on the rise among struggling small businesses in need of cash to pay operating expenses. CFIs should be on the lookout for rising credit card debt among small business customers and offer help and counseling to them. Small banks should also be looking for ways to offer new and innovative lending products for small businesses.
