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Managing Your Money

Why Do Financial Regulators Discriminate Against Small Business Owners?

Small business credit cards are a living embodiment of the notion that you shouldn’t judge a book by its cover. While these cards are branded for small business use and small businesses are ostensibly the backbone of our economy, the landscape is fraught with regulatory icebergs that owners must navigate if they wish to attain lasting business success.

More than 80% of small business owners use credit cards each year, you see, and the vast majority of them are not aware that small business plastic does nothing to shield their personal finances from liability in the unfortunate event of business failure. All of the major credit card companies hold small business card users personally liable for unpaid debts, and most also report usage information to users’ personal credit reports.

In other words, your personal savings and credit standing are on the line when you use a business credit card as a financing vehicle – as roughly 30% of owners do on an annual basis.

Compounding the risks exponentially is the fact that the Credit CARD Act of 2009 does not apply to small business credit card users. Most notably, that means small business owners are not afforded the same protection against arbitrary interest rate increases as ordinary consumers. You have to be at least 60 days delinquent for an issuer to raise rates on a consumer card’s existing balance, but it can happen at any time – whether or not it’s warranted – with a business card.

One would have to assume such debt instability to be bad for business, and it is, according to Molly Day, vice president of public affairs for the National Small Business Association. “Credit card debt instability is a huge problem for smaller businesses—particularly younger businesses since they rely more heavily on credit cards,” she says.

The question, therefore, is why Congress and financial industry regulators have allowed this legal imbalance to take shape. The most likely answer, it would seem, is that small business owners do not need the same level of legal protection as the general consumer population because they are inherently savvier to begin with.

“I’d guess that the biggest factor was the idea that these credit card users were sophisticated financial consumers who could both understand the complex terms of credit card contracts and walk away to better options if they did not like the terms they were being offered,” David Min, professor at the University of California, Irvine School of Law, told CardHub. “The CARD Act was primarily concerned with protecting more vulnerable, less sophisticated consumers, and this is consistent with financial regulation generally, which tends to be more focused on middle- and working-class Americans.”

Banking industry lobbying efforts probably played a significant role as well, considering how much money recession-era regulations have already cost big banks. Those efforts – not to mention Congressional dysfunction – are likely why Rep. Nita Lowey’s would-be extension of the CARD Act to the small business community will not be realized this year.
That’s a shame too, considering that “credit card users would benefit from a level playing field for everyone,” according to Amy Traub, senior policy analyst with the think tank Demos. At the end of the day, no matter how savvy you are, you can’t protect yourself from arbitrary interest rate increases that are impossible to foresee, save for swearing off credit cards altogether.

Forget regulators and lobbyists, though. We have to be our own advocates these days, and there are a couple of different ways to overcome this regulatory imbalance.
The first is to use a business credit card from one of the industry’s most forward-thinking issuers. That designation currently goes to Bank of America – at least as far as small business credit cards are concerned. BofA is the only major credit card issuer that has extended all of the most important CARD Act protections to its suite of small business card offers.

But while using a Bank of America business credit card does not put you at a regulatory disadvantage relative to consumer cards, it does significantly restrict your ability to comparison shop. Not only are you limiting yourself to cards from one particular issuer, but you have to find an offer that provides both decent rates and rewards in order to minimize the cost of debt as well as subsidize everyday expenses. That is the recipe for opening a card that is a jack of all trades, but a master of none.

A preferable option, assuming you can handle two credit cards at one time, is to follow the Island Approach. More specifically, using a business card for everyday purchases and a consumer card for financing purposes will enable you to get the best possible business rewards as well as the best possible interest rate terms.

Regardless of which route you decide to pursue, you can take solace in knowing that you’ve set yourself on a course that avoids some of the most significant, unnecessary headwinds facing small business owners these days.

Odysseas Papadimitriou is CEO of the personal finance social network WalletHub and the credit card comparison website CardHub. He previously worked as a senior director at Capital One.

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