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Small Business Credit Card Companies are not Evil (Most of the Time)



We wanted to dispel a common myth we hear about the credit card industry. And that is that the small business credit card industry is full of callous, blood sucking leaches trying to rip off small businesses. Most of them are not. We’ve worked with them and most of them are pretty genuine people trying to build things that people want (the definition of a good business, right?). It’s also in their interest to have a bunch of successful businesses as customers as you’ll borrow more as you grow which is good for them.



Of course, there are some bad apples/actors as there are in any industry who do some dumb cr^p. And on occasion, even folks we know do some dumb stuff which has even made our lives as a small business more difficult.

But despite the shenanigans, small business credit cards are important and vital to businesses?

Why are Small Business Credit Cards Important to Our Economy?

Small business is now widely regarded as the principal generator of net new employment in the United States and small businesses cannot succeed without credit to fund the growth of their business. The two primary and significant forms of small business credit are: (1) credit extended by financial institutions (bank loans, credit cards) and (2) trade credit which is vendor financing of purchases. The reliance on external debt financing was quantified by the Kauffman Foundation, whose research found that “nearly 75 percent of most firms’ startup capital is made up in equal parts of owner equity and bank loans and/or credit card debt, underscoring the importance of liquid credit markets to the formation and success of new small business.

In particular Credit cards have become a critical tool in expanding small business access to credit. They particularly serve businesses when in need of quick access to funds, and when going through the process of getting a business loan is not a viable option whatever the reasons.

The following sources and reports have made clear just how important credit cards have become for small businesses:

  • MasterCard has reported that “more than half of all small businesses in the United States use a credit card for financing.”
  • The National Small Business Association’s “2008 Year-End Economic Report,” which surveyed small businesses over the last two weeks of December 2008, had a similar number.

Why We Sometimes Hate Small Business Credit Card Companies?

As we just covered, small business credit card companies are generally not bad, evil or deserving of your scorn. They fill an important gap in the credit markets in markets like the United States, United Kingdom and many others.

But of course that doesn’t stop them from doing dumb stuff on occasion that either mildly confuses us or makes us full-on angry at them for their evil-doing ways.

The other big thing that a business owner should know is that the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) which went into effect in early 2010 does not cover business credit cards and only consumer-oriented credit cards. What this means is that credit card companies who are restricted on the consumer side may turn their attention to promoting small business credit cards where they have more freedom.

One option we’ve considered and heard from other small business owners is to just get a personal credit card but use it only for your business. This way, you get the CARD protections. You will lose on some business-specific features of these cards, but in theory, we’ve not been able to come up with a reason why this is a bad idea. Anyone have ideas?

But in the interim, here are the top dumb and/or evil things that small business credit card companies do that make us hate them? Many are just dumb and a few are evil.

  1. Rate Hikes
  2. Fee Increases or new fees
  3. Raise minimum monthly payments
  4. Make rewards less rewarding
  5. Random limit changes (or cancellations) of accounts
  6. Hard to understand terms and conditions
  7. Terrible website usability

Rate Hikes

It sucks when this happens on your small business credit card. But let’s be honest, you really should not be rolling over a balance on a credit card unless you have an absurdly low (usually temporary) rate. Credit card interest rates are high (see the section on how small business credit cards make money).

But we know it happens occasionally to the best of us and we have to rollover a small balance on a credit card.

The reality for small business credit card holders is that card rates have been increasing steadily for some time. While there are state “usury” (charging of interest) laws that cap interest rates on loans, credit card companies have found ways to avoid these laws based on the location of their bank operations. The recently passed CARD act does aim to curb abusive practices, but as stated earlier, this doesn’t apply to small business credit cards. So in reality, card companies can raise rates on existing balances and also if you’re late on payments or do other things that the credit card companies deem undesirable or even if they just perceive you or the general market to be riskier.

Unlike consumer cards where the CARD Act prevents credit card issuers from increasing rates in the first twelve months unless of course you’re late, small business credit cards don’t have the same protection, another way that rate hikes can slip in.

Since small business credit card companies still have a lot of leeway in how they treat rates, the onus will be on you to ensure that you look at all those little things you get in the mail with the tiny print to see what the impact on you may be. The best strategy will usually be that you don’t rollover balances on your card and don’t be late with payments. That said, in the heat of building a business, these things may slip on occasion so try to find a credit card company that cares about your lifetime value and not fleecing you at every potential opportunity. And because rate hikes can be made for really any reason, it’s important that you do look at your statements to ensure they look as you expect.

Fee Increases or new fees

The fees that small business credit card holders may see are ever-changing and never fun. There are annual fees, inactivity fees, spending threshold fees, i.e., if you don’t spend this much, you’ll be charged an annual fee.

Again, the CARD Act addressed existing fee types and structures but the challenge is that it doesn’t cover small business credit card fees. And so as card companies figure out ways to make up for lost financial performance or pressure on the personal credit card side, they may come up with new, sometimes sinister ways to increase fees on your credit card companies.

Raise minimum monthly payments

As you might have gleaned, we don’t think you should be carrying a balance on your small business credit card. And given this, we hope you’re making more than your minimum monthly payment, but of course, stuff happens. Let’s say you’re waiting on a customer payment and so cashflow is a bit tight in a particular month.

The evil practice here is that small business credit card companies can raise the amount of your minimum monthly payment and so instead of owing $200 on your $10,000 balance (2%), you may owe 4% which is $400. In a month when cashflow is tight for you, this is less than ideal.

Again, the CARD Act protects the consumer side of the equation and limits the amount that minimum monthly payments can increase, but small business credit card holders are not afforded the same protections.

Lesson learned: Watch the fine print and do all you can to pay your balance off in full. Prayer may also be useful.

Make rewards less rewarding

This is one of our favorites. American Express SimplyCash, which is one of our cards, has done this by changing up what types of spend you get extra cash back for and capping the amount of spend in a month is eligible for cash back. They also instituted fees if you don’t spend a certain amount on the card. That’s not good for us.

But changing up rewards is an age old trick. This is not just relegated to cash back awards but travel points which are becoming increasingly less lucrative.

If you pay late, you may also forego your reward points, but lucky for you, you can usually pay a fee to get them back. Definite evil-doing going on within rewards arena amongst some of the small business credit card issuers.

Here is some unofficial math on credit card rewards for those who really want to get into the weeds. Card companies want to keep their cost for rewards less than 1% (usually closer to 0.0065 to 0.0085% or 65 to 85 basis points in financial speak).

So how do they do this? With cash back cards which promise 1%, they limit the amount on which you can get the 1% back (only on the first $3000) or they institute annual fees. This serves to bring their average cost of the reward down.

The other way that travel rewards have been good at doing this is by getting you to not redeem travel. Redeeming travel is the most expensive thing for credit card companies generally. And if it’s expensive for them, it probably means it’s good for you. But the card companies try to get you to use your travel points for other types of awards – sometimes retail goods or sometimes experiential events (attend a Barbara Streisand concert and meet her or something like that). These are much cheaper for them. So you redeem and get something you want, and it cost them a lot less money. Win, win!

Random limit changes (or cancellations) of accounts

Very infuriating and potentially embarrassing are limit changes. They have deemed you or your small business more risky or perhaps you were late on a payment or perhaps you weren’t really using the limit most months, and so they decide to decrease your limit. They may overtly say why or they may smoothly say something like “we are reducing your limit to more closely align with your spending.” Don’t be fooled by this. They deemed you more risky or somehow less attractive and are changing your limit to reflect this.

It’s usually not the end of the world, but it can be an ego blow when this happens. It can also be embarrassing if it occurs when you are out with clients for example at dinner and your card comes back rejected.

Changing the limit is the first step to potentially cancelling your account completely. Small business credit card companies have every right to do this and they can based on their risk models and assessments of your health.

Hard to understand terms and conditions

All of the above are bad or evil things that small business credit companies do, and the ultimate beauty is they tend to wrap them into the most opaque set of fine print you’ll ever see. Not as bad as reading a mortgage document but on par with a colonoscopy, credit card terms of service are horribly unclear and less than customer friendly in most cases.

The CARD Act does protect consumers again on this front to some extent, but small business credit card holders must fend for themselves.

Terrible website usability

The small business credit card companies come in a wide variety of shapes and sizes when it comes to website usability. Comparing cards against one another from a particular issuer is usually not what it should be on most sites (translation: it’s terrible). Payment process flows are not always super intuitive and require clicks that and actions that seem inefficient.

You’d think that since they have you as a customer, they’d want to make it easy for you to do what you need to do online so you don’t have to call into their call center. Those calls are a “lose lose” as it costs the small business credit card company more money to service a business owner’s request on the phone, and wastes more of a business owner’s already limited and valuable time thereby chipping away at their relationship with the credit card company. Self-service is good when done right.