-- The majority of business owners (61 percent) are more optimistic about
the economy and the overall success of their businesses in 2007.
-- As a result, 61 percent plan to increase their overall business
expenditures this year, with 64 percent planning to begin using, or
increase usage, of their credit cards for business expenditures in 2007.
-- However, only 50 percent understood the actual long-term costs of a
$5,000 credit card charge if only minimum payments over a five-year period
are made.
True Costs of Using Credit Cards
One objective of the CAN Small Business Barometer survey was to determine
how the use of personal or business credit cards fits into the overall
financing decisions of small and mid-sized businesses. The results
indicate that 72 percent use their personal or business credit cards for
purchases over $5,000 two or more times a year. Survey respondents also
said they thought they had a strong understanding of their current interest
rates and knew they might be subject to increased rates with as little as
one late payment (92 percent awareness). According to a recent report from
the US Government Accountability Office, 35 percent of active US accounts
were assessed late fees and 13 percent were assessed over-limit fees in
2005, causing some credit cards to charge penalties in excess of 30
percent. These costs can be significant. A 2004 bankruptcy case in
Virginia showed that over a two year period, the debtor made only $236 in
purchases on the account while making $3,058 in payments including finance
charges, late charges, over-limit fees, bad check fees and phone payment
fees.
Although business owners may know that these charges can occur, they may
not understand how much they will actually pay. One half of the small
business operators surveyed in today's study responded that they did not
understand the actual long-term implications of a $5,000 credit card charge
while making only minimum payments over a five-year period.
According to data from the Federal Deposit Insurance Corporation (FDIC),
the true cost of using a card for this type of purchase is extremely high,
even though it may seem like a reasonable monthly minimum payment. An
initial charge of $5,000 with an 18 percent annual percentage rate can
amount to an actual cost of more than $18,000 and would take nearly 46
years to pay off if only the minimum monthly payment was made (assuming
that the minimum is two percent of the outstanding balance). Of the
respondents in today's small business survey, more than half indicated they
are currently using a card with an interest rate ranging anywhere from 10
percent to as high as 20 percent, with the median rate falling at 14
percent, which is inline with the current average rate according to
Bankrate.com which is just under 14 percent.
Starting Interest Monthly Years to Total Total
Balance Rate Payment Pay Off Interest Cost
(APR) Paid
-------- -------- -------------- -------- --------- ---------
$5,000 18% The minimum 46 $13,926 $18,926
($100 the
first month,
then gradually
declines)
Source: FDIC 2003
These results suggest that business owners may be foregoing financial
options that are more cost effective in the longer term due to lack of
information and awareness of alternatives.
Growing Awareness of Alternative Sources of Cash
In addition to credit card usage and spending priorities, this survey asked
respondents to identify preferred methods for acquiring the capital needed
to maintain and grow their businesses. Topping the list was a traditional,
collateral-based bank loan, (57 percent) followed by obtaining an advance
on future sales (23 percent), also known as a Merchant Cash Advance. Other
methods, including second mortgages, loans from friends and family and
loans co-signed by friends and family, were the least appealing choices,
accounting for only 20 percent of responses.
Merchant Cash Advances enable a merchant to employ their future credit card
sales, an asset unrecognized by most traditional financial institutions, to
raise working capital. The survey responses illustrate an increased market
awareness for Merchant Cash Advances (30 percent) and 16 percent of those
responders had, in fact, obtained a Merchant Cash Advance previously.
However, the small business market is still not fully educated on
alternative funding products, with many small businesses still unaware that
they can sell their future credit card sales in exchange for working
capital.
Generally, Merchant Cash Advance providers purchase fixed amounts of future
credit card sales at a discount. Collection of the purchased credit card
sales occurs automatically through the merchant's credit card processor.
The Merchant Cash Advance provider receives a fixed, predetermined
percentage from each credit card sale made to its customers. Since it is
sent a set percentage and not a fixed dollar amount, the provider only gets
paid when the business does, helping manage cash flow throughout the year.
No fixed payments or application fees apply. Unlike other financing
products, the owner knows upfront exactly what the total cost of the
funding will be -- it will never exceed the amount of the credit card
receivables sold.
Capital Access Network Small Business Barometer
The CAN Small Business Barometer will be released quarterly and is
commissioned by Capital Access Network with the purpose of capturing and
reporting data that will continue to support the growth and viability of
small businesses across America.
About Capital Access Network, Inc.
Capital Access Network is based in Scarsdale, NY. For additional
information regarding the survey, please contact Diane Naczi at
770-590-9822 X382 or visit www.CapitalAccessNetwork.com.
Contact Information: Heather Graham Trevelino/Keller Communications Group 404-214-0722 x103 Email Contact