Small businesses have been in a bind about borrowing since the onset of the financial crisis in 2008, when bank lending fell off a cliff.
But some entrepreneurs have found a back door to the financial watering trough. Many are borrowing using consumer credit cards, eschewing more classic business cards, according to the National Federation of Independent Business and other groups that track small business borrowing.
"Consumer cards have more consumer-friendly protections in terms of the amount of fees a bank can charge, when they can give you a rate increase, and how much notice they have to give you about changes," says Janna Herron, a credit-card analyst for Bankrate.com. "Small business credit cards don't."
That's because the Credit Card Act of 2009 protects consumers against arbitrary increases in credit card rates, stipulates consistent timing for bill-due dates, regulates proper debiting of transactions, and limits fees, among other things.
The move by entrepreneurs into using consumer credit also belies a dirty secret in the business world: Consumers have almost exclusive protections for credit card transactions and electronic bank transactions. Small-business owners are treated like an entirely different class of citizen: They have next to nothing.
Sections of older legislation passed by Congress, called Regulation E and Regulation Z, which govern electronic-funds transfers and credit-card transactions specifically, also limit consumer liability for theft and fraud. Typically if a credit card is lost or stolen, consumers will only be liable for $50--and most not even that. Many banks have "make your customer whole" policies, meaning customers don't pay a cent.
That's certainly not the case for business owners.
"Consumers have special rules and liability protections under Regulation Z that business does not," says Bill Repasky, a partner with the law firm Frost Brown Todd in Louisville, Kentucky.
The protections from the Card Act factored heavily into Richard Belton's decision to put business expenses for Knoshbox, his artisan-food subscription service with two employees, based in Deep River, Connecticut, on a consumer card from JP Morgan Chase.
"We've seen more protections and transparency on consumer cards, where interest rates can't change without notice, whereas on business cards, the interest rate can jump to the max," Belton, Knoshbox's founder, says.
About 80% of small-business owners use one or more credit cards in their operations, according to an early 2012 survey of 850 small businesses by the National Federation of Independent Business.
Forty-nine percent of small-business owners currently use personal cards for business, compared to 42% in 2009. By contrast, 59% of small businesses with employees used one or more business cards, down 5 percentage points from 2009, NFIB reports.
Those numbers are borne out by Synergistics Research, a small business and consumer research firm, which reports 30% of small business owners surveyed in 2011 used corporate or business cards exclusively, compared to 47% in 2007.
In part, small-business card issuers have done a poor job marketing the cards to business owners, failing to draw distinctions between the features of the two kinds of cards, says Bill McCracken, chief executive of Synergisgtics.
For example, small-business cards tend to provide business owners with advanced reporting capabilities and allow business owners to enroll their employees on the cards, he says.
"As small business people start to compare all the benefits of each of the two types of cards, they can see the consumer card has better terms for them," McCracken says.
But small-business owners say consumer cards are better for carrying balances for longer-term business investments, because the credit lines and the interest rates are not subject to arbitrary changes, as the interest rates on business cards are.
That was a significant concern to Michael Prichinello, director of Classic Club Car in Manhattan. The 12-person company rents classic cars to its members, and often has to charge tens of thousands of dollars each month for things like tires and other car parts.
Alhough Prichinello says the company made regular payments on the outstanding balances of its business card, a CitiBank card, the credit line shrank without warning to $2,000 from $50,000 recently.
"We weren't able to spend anything, so I said, 'Let's just get our own credit card,'" Prichinello says.
Nevertheless, there are risks with that strategy too, experts say. For example, if there are substantial fraud transactions on a consumer card, banks could do some digging and determine that the legitimate card transactions were for business purposes.
In that case, the business owner might still be on the hook for the fraudulent expenses.
"At the end of the day, the test is not what card are you using, but what was the purpose of the transaction," says Jane Shea, counsel at Frost Brown Todd.