What SMB Owners’ Personal Credit Card Dependency Means For The Recovery

For a significant number of small- to medium-sized businesses (SMBs), navigating through the economic headwinds wrought by the pandemic, in plastic they trust.

And by plastic, we mean credit cards.

The ripple effects may be negative ones for card giants.

As CreditCards.com estimated, a bit more than one-third of nearly 500 SMB owners in the United States have been tapping their personal financial lifelines, such as credit cards, to keep businesses operational. That may represent a sea change from the archetype of SMBs that start out on a shoestring — and credit card advances to cross the Rubicon from concept to reality.

“People have really put their livelihoods on the line here,” CreditCards.com analyst Ted Rossman told Bloomberg. “I think they feel really responsible, too — that they’ve already put in so much blood, sweat and tears, and they don’t want to see it fail.”

As the July survey from CreditCards.com found, 35 percent of SMBs surveyed said that they’ve used personal funds to finance operations in the age of the pandemic. Breaking that number down a bit, 24 percent of respondents have used personal credit cards, 21 percent have used savings.

As many as 10 percent have used both sources.

The findings also show that 29.6 percent have used loans available through the Paycheck Protection Program (PPP).

About 20 percent of respondent have been using business credit cards.

All of this may not be enough. About 53 percent of SMB owners said they will need more sales or at least some type of assistance just to stay in business this year. About 32 percent said they will need an increase in sales to make it to the next year. About 19 percent said that government assistance is necessary. Roughly 13 percent said they will need other types of loans.

Bloomberg noted Friday that smaller firms that bring in less than $1 million annually need their owners to back the debt that is being taken on.

“I worry, however, about the debt [business owners are] taking on, and how they’re potentially putting their personal finances at risk,” said Rossman in the announcement detailing the study’s findings. He said, too, that typical debt reduction tools have been on the wane, as 0 percent balance transfer offers have dwindled.

As PYMNTS reported in recent days, legislation proposed by U.S. Republicans would, among other things, lower the employee cap for eligibility from the current 500 to 300. A subset of funds would also go toward micro-businesses with 10 or fewer employees.

The Sentiment Of Main Street

PYMNTS’ own, ongoing series of Main Street business sentiment dovetails with the heightened sense of urgency about tapping newly available sources of capital. Recent research shows that, in May for example, the share of firms applying for PPP funding had risen to 46 percent of all companies surveyed, up from 41 percent the month before.

A late July TransUnion report focused on consumer credit (which would encompass the personal credit lines tapped by business owners) found the percentage of accounts in “financial hardship” started to level off as of June, due in part to at least some accounts coming out of financial hardship status. Financial hardship status was 3.6 percent credit cards in June, and 7 percent for personal loans, compared to 3.7 percent and 6.1 percent, respectively, in May — and up markedly from a single basis point (for credit) and 48 basis points (for loans) in March.

As estimated by TransUnion, 1.5 percent of credit cards and 3.1 percent of personal loans were delinquent in June. In terms of individual card firms’ performance, Capital One said in its latest earnings report that its net charge-off rate was off 33 basis points to 4.5 percent. Banks, as recounted by The Wall Street Journal, have been setting aside reserves to cover potential loan losses — where, for example, J.P. Morgan set aside a bit more than $10.4 billion, and Wells Fargo reserved about $9.6 billion in the latest quarter.

There’s no easy road, ahead, then, for Main Street as unemployment remains high and demand remains muted at best. And those financial lifelines are being pulled taut.