Senator Bernie Sanders (I-Vt.) and Representative Alexandria Ocasio-Cortez (d-N.Y.) have announced a plan to cap credit card interest rates at 15 percent. Their proposed bill, called the "Loan Shark Prevention Act," is well-intentioned but flawed.
Sanders anticipated this reaction. "I am sure it will be criticized," he said in a May 9 interview with The Washington Post. "I have a radical idea: Maybe Congress should stand up for ordinary people."
That's an awesome sentiment, and one which I endorse wholeheartedly. Unfortunately, the way I see it, small-business owners will be hurt by the legislation if it passes.
The question boils down to the following: Are there situations in which using a high-interest credit card is an entrepreneur's best option? I think the answer is yes, and here's why:
Sometimes, a high APR makes sense.
In my early 20s, I opened a business that repaired and manufactured commercial signs. The first billboard I developed cost me $25,000 in materials, and every dime was put on a credit card with a rate above 20 percent. The monthly interest payment was about $500, and the monthly minimum repayment on the card was about $750, making a total monthly payment of $1,250.
I rented out both sides of the billboard for $1,500 per month, which created $3,000 in monthly cash flow, with $1,250 servicing debt. A year later, I sold the billboard to Lamar Outdoor Advertising for $130,000.
Factor in the labor to build and install it, and I was probably into the billboard $50,000 in total. Thanks to the business credit card, I earned $21,000 in profit renting it and $80,000 when I found a buyer.
That's $101,000 in profit in one year, after spending only $6,000 on "expensive" interest rates. Considering those numbers, it would have been sensible to pay 100 percent interest, let alone 20 percent.
You need room to maneuver.
Unlike consumers, small-business owners aren't on a fixed income. Your profit margins increase or decrease depending on opportunity. If you're in retail, for example, Christmas is a big deal--you stand to see significantly higher revenues in December than in January.
Accordingly, when Santa starts loading up his sleigh, a credit card with a 30 percent APR could be a very useful tool for you. It might land you a job where you spend $1,000 on interest for two months while scoring $10,000 in profits.
My company, Nav, did an analysis of small-business owners' credit card use and found that business owners carry twice as many credit cards as consumers. You should be granted the discretion to use this resource as you see fit--in other words, the trust to pursue opportunities according to whether the numbers work in your favor.
Legislation that decides for you would stifle commerce. If half of your credit card choices disappear overnight, your credit scores will drop. You'll have to flock instead to subprime options that are a hell of a lot more expensive than what you were paying to begin with.
In the grand scheme, business credit cards are highly effective products, which is the reason I built my business around them. They're flexible: You can use them anywhere and on anything. They can be abused, of course, but I think they do far more good than harm.
That's why I see the Loan Shark Prevention Act, while laudable in theory, as a boon to predatory lenders in both consumer and small-business spaces. We shouldn't let protecting people from making dumb decisions stifle the progress and potential happiness of those who make smart ones.