Card Issuers Choke Firms With Rate Hikes, Limit Cuts

March 17 (Bloomberg) -- Susan Woodward isn’t renewing the lease on her music boutique and internet cafe in Jackson Hole, Wyoming, after nine years. The reason: doubling interest rates on her credit cards.

“My business is seasonal, so we count on credit to stock the store at the end of the slow season and prepare for the busy season,” said Woodward, who canceled her Citibank and Capital One credit cards in February after learning that rates would climb to 19 percent from 10 percent. She said she always made timely payments and kept low balances.

Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit- card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey of 250 firms by the National Small Business Association, a trade group with more than 150,000 members.

The increase in credit-card costs has forced some business owners to stop using their cards, and at the same time declining credit limits are cutting their access to cash, said Todd McCracken, president of the Washington-based NSBA. Twenty-eight percent of small businesses in NSBA’s December survey said they had their card limits or lines of credit lowered in the second half of 2008.

There were about 27 million companies with fewer than 500 employees in 2007, according to estimates by the Small Business Administration’s Office of Advocacy.

Loans Drying Up

Bank loans are drying up as an estimated 70 percent of U.S. banks have tightened standards for small-business loans, based on a Federal Reserve January survey of senior loan officers.

Financial institutions may slash $2.7 trillion in credit- card lines by the end of 2010, according to a report published last week by Meredith Whitney, chief executive officer of Meredith Whitney Advisory Group LLC in New York. Small-business owners often use business and personal credit cards, with 41 percent relying on a combination of both, based on data compiled by the NSBA.

“Small businesses in particular are getting squeezed on multiple credit fronts,” said Alan Blinder, an economics professor at Princeton University and former vice chairman of the Federal Reserve. “Some businesses are forced to turn to very expensive forms of credit or not get credit at all.”

Independent businesses with fewer than 500 employees created 60 to 80 percent of new jobs annually in the U.S. during the last decade, according to the Washington-based Small Business Administration’s Web site.

Credit Plan

President Barack Obama and Treasury Secretary Timothy Geithner said yesterday the U.S. will free up credit for small businesses by raising federal loan guarantees on Small Business Administration lending and increasing bank liquidity.

“Small businesses are the heart of the American economy,” Obama told a gathering of small-business owners, community banking executives and lawmakers at the White House. He said the measures announced yesterday are a “first step” of a continuing effort to help small business.

The Fed plans to start disbursing funds on March 25 from its Term Asset-Backed Securities Loan Facility program, or TALF, to prop up the market for consumer and small-business loans.

“If it succeeds, the TALF can be an important step in both preserving what’s left of consumer and small business lending and restoring those markets,” Blinder said.

Decrease Balances

If card limits are slashed or interest rates are increased, small-business owners should try to decrease the balances on all of their cards, not just one, so the ratio of debt to available credit is lower, a key in determining credit scores, said Jeff Van Winkle, an attorney in Grand Rapids, Michigan who represents small-businesses owners.

Borrowers should also ask vendors if they will extend credit so they can defer payment to the vendor, without penalty, instead of to the credit-card company, Van Winkle said.

Vendor financing may not be an option for Ralph Soto, who owns a construction company in Lutz, Florida. Twenty percent of the suppliers he uses won’t extend credit or are reducing credit lines, which has prevented him from bidding on certain projects that require up-front funding. Soto, 41, said the rate on his card issued by Capital One Financial Corp. has tripled, forcing him to cancel the card.

“If lenders don’t manage risk, they won’t have the funds to lend to anyone else,” said Ken Clayton, senior vice president of card policy at the Washington-based American Bankers Association. One significant way to manage risk in these economic circumstances is to reduce credit lines, Clayton said.

Risk Environment

Charge-offs, which are loans the banks don’t expect to be repaid, were 7.1 percent on average in January compared with 4.6 percent a year earlier, according to data compiled by Bloomberg. Consumers are falling behind on credit-card payments as U.S. unemployment reached 8.1 percent in February, the highest level in more than a quarter century.

American Express Co., the largest credit-card company by purchases, said yesterday net charge-offs rose to 8.7 percent of loans in February from 8.3 percent the previous month.

New York-based Citigroup Inc. may cut credit lines by $600 billion and Charlotte, North Carolina-based Bank of America Corp. by $500 billion, according to Whitney. She estimated New York-based JPMorgan Chase & Co. and American Express would decrease lines by $300 billion and $100 billion, respectively.

Rate Increase

Some customers will have their interest rates increased to reflect the current risk environment, said Pam Girardo, a spokeswoman for McLean, Virginia-based Capital One. Customers were notified in writing with a minimum 45-day notice and can opt to decline the changes and close the account, she said. A Citigroup spokesman, Samuel Wang, declined to comment on the specifics of Woodward’s case.

Woodward, 41, said three other stores along the main square in Jackson Hole are already empty, an unprecedented sight in her more than 20 years living there.

Since American Express reduced Jim MacRae’s credit limit from $25,000 to $1,500 and San Francisco-based Wells Fargo & Co. almost halved his business line of credit, he has been forced to require more than a 50 percent deposit from customers who buy office furniture from him. He can no longer afford to keep inventory in stock and sales have dropped by about 80 percent, he said.

“The stimulus package isn’t giving the companies I sell to the feeling that everything is going to be okay,” said MacRae, 59, who lives in Newport Beach, California. “Instead of buying office furniture, they’re laying people off.”