The specter of looming tariffs has created a great deal of uncertainty for the backbone of the American economy: small businesses. As if inflation and high interest rates were not stressful enough, many smaller enterprises in retail and manufacturing face the prospect of supply chain disruptions, impeded cash flow, and questions about operating costs.
This uncertain landscape is also creating opportunities for card issuers. In Riffing on Tariffs: Now Is the Time to Build Up Your Small Business Portfolio, Brian Riley, Director of Credit Advisory Services at Javelin Strategy & Research, examines the ways small businesses use their credit cards and how forward-looking lenders can help them stay on their feet.
Keeping the Lights On
The primary reason small businesses fail is cash-flow problems. They need a vehicle to manage their cash flow, which in most cases means a credit card. Consumers need a steady cash flow to keep the household running and pay the rent, but businesses require a different strategy. In addition to the same pressures to pay expenses, it also must make sure it has change in a till drawer. A household risk going delinquent without destroying its financial situation, but that could be more of a challenge for a small business.
Javelin’s research has found that the primary use for small businesses’ credit cards is paying their monthly utility bill. Utilities represent a significant expense for many small businesses as an ongoing charge that they need to pay every month. If an enterprise runs late on a utility bill, it risks being unable to conduct business. Tying utility bills to a small-business card allows the owners to set up a recurring payment and free up some cash while at the same time harvesting points.
The spending on small-business credit cards is very high, and it’s not unusual for them to have $50,000 credit limits. But owners need to be careful where they spend that money.
“It’s not really where you want to go for working capital,” Riley said. “The interest rates tend to be higher. But by the same token, if you’re not well-established, it might be the only place you have to access some readily available funds.”
The use cases vary for different enterprises, but the cards are particularly valuable for entities in seasonal businesses, like agriculture. Income comes in quickly when such businesses are selling seed or produce. But there might not be revenue coming in for months when the crops are maturing. Business owners have to be able to finesse that timing, and a credit card can help.
The Case for a Single Card
The typical household has three or four cards. The typical small business, by contrast, has only a single credit card, primarily because of the relationship it builds with its bank. Businesses are loyal to the banks that serve them.
But that doesn’t mean the market is closed off when a business already has a single card. Issuers should look for reasons to become an entity’s second card, especially amid the economic uncertainty many are expecting. Being the next card in the owner’s wallet or purse is still an opportunity to gain a new account. Spending will follow once the new account booked, and there’s a chance for a bank to provide the business with even more services.
“Small businesses tend to be less organized,” Riley said. “Some of them use very simple software packages to manage their finances, and there might be some easy opportunities there.”
Getting In on the Ground Floor
Small-business cards represent an area that some top banks have addressed aggressively. But not all of them have, leaving an opportunity for smaller institutions that rely more on personal relationships to come in with an alternative.
“It’s a good spot for credit unions and community banks to grow,” Riley said. “They have very different proposition than big banks. It’s more of a personal relationship with their customers, creating the down-home feeling of a small bank versus a money center bank.”
Small-business cards are dominated by American Express, which has more small-business volume than MasterCard and Visa combined. Amex approaches the market with more than a dozen card plans aligned to either the firm’s iconic brand or a top co-brand partner.
Selling a small-business card is in many respects like selling a consumer card. Issuers love to market to people in college, when they are just getting established.
“Once you’re there, this person’s going to have a spouse or a partner along the way,” Riley said. “They’re going to move into their own place. And then sooner or later, they’re going to need a car. There will be lots of financing opportunities along the way.
“The same thing goes on the small-business side. You want to get your foot in the door, so that you are then be able to upsell and cross-sell to the business. The ultimate goal is to get the business owner into deposit products. You’ve moved from the small-business credit card to a full-service relationship. If the small business ends up doing really well, you will be able to get into the whole lifecycle management.”
Uncertainty and Risk
But the looming economic uncertainty means issuers will have to be careful about managing risk. Small businesses need higher credit lines and will spend more than holders of consumer cards, so an issuer can expect volume but will need to stay vigilant.
“The financial institution should carefully assess the credit score on the way in and keep scoring throughout the relationship,” Riley said. “Watch for pattern changes, deep economic challenges, and the nuances of the different business sectors.
“Small businesses really need their credit cards, especially now. Smart business owners will be ahead of the curve when it comes to managing their cash flow, while those who are not prepared will need the cards even more.”
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