wearmanyhats

About a week ago, I heard a discussion on National Public Radio concerning upcoming legislation about credit card companies. There are some new credit card rules that are meandering their way through the Congress, and these would help guard against predatory lending with credit card companies.   It would make it easier to get payments in with extra mail time, and keep companies from implementing interest rate jack ups for slightly late payments.

The call-in discussion that ensued was interesting, but the most startling comment came from a small business owners.  She said that she needed her credit card for brief, periodic times when credit was important to help keep her business running smoothly.   When she called the credit card company on an unrelated issue, they began questioning her about her debt to income ratio.  Within minutes of the conversation, the credit card company canceled her card, essentially stranding her from having the necessary credit to tie her company over.

Not everyone understands why businesses sometimes need a line of available credit.  There is a time gap, sometimes, between when a business owner delivers a service and gets paid.  Let’s take, for an example, a car mechanic.  He finishes changing out a transmission for a customer, who has insurance for such jobs.  The customer pays the $100 deductible, and the business owner must pay his mechanics for the work, their unemployment insurance, the insurance on the building, etc.  The business owner submits the paperwork for the remaining $2800 and waits for the time to process the request for the payment, which can typically take six weeks, maybe longer.

Most small business owners take a line of credit with their local banks; it’s easy to secure.  First you walk in with your balance sheet and say how much you have coming in from the insurance companies or any other company that has a bureaucratic time frame to deal with, and usually a loan is given to make payroll and pick up any operating bills.  As time goes on, and the business generates more capital, these kinds of loans are only needed in a time of economic downturn or a change in the business somehow.

Another example would be a doctor who has a her own medical practice.  Let’s say that she knows that in order to operate her business and make a modest profit, she needs to charge $65.00 per visit.  However, insurance will only pay her $55, and medicare and the VA only gives $40.  Just to break even, she needs to make $46.  She can limit how many Medicare and VA patients she can take, but sometimes more of them need to be seen in a row than regular paying clients.  She starts to drift behind with her profitability and realizes that to keep her business afloat, she must limit her clients to even fewer Medicare and VA patients, plus charge a bit higher for the office call so she can retain her staff and cover her expenses.  In this situation, she will go to the bank to secure a loan for a time being, explaining all of this situation to show why she needs it.

Now what do you do if banks suddenly no longer want to be a partner in this loan process?  There are other means of securing financing, thank goodness, but sometimes small companies won’t have the time to get that credit.  Soon, more and more companies fail, generating more job layoffs.

Enter the credit card companies.  Some small business people just use their credit card to pay the bills if the banks aren’t loaning or the short term financial situation will turn around quickly.  What scared me about that call is that these companies are just dropping the credit card people without any warning, thereby shutting off another means of keeping small businesses alive.

Bad times in a nation have a way of passing.  But now we must know what is coming our way.   Small business owners shouldn’t offer up too much information if their financial situation looks even a bit risky.  And it is time to hunker down and pay the bills.  Hopefully as times get better, companies will just get stronger..

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