Are small business owners getting short-changed by banks?

Small business loans totaled $4.1 billion in 2013, and banks have nothing against small business owners. But according to research, they are currently getting short changed when it comes to their credit cards and checking accounts. But why?

Jonathan Bainbridge/Reuters/File
MasterCard credit cards.Small business checking accounts tend to carry higher costs and lower interest than consumer or corporate accounts.

Do banks have something against small business owners? Of course not. With the aid of its partnering banks, the U.S. Small Business Administration issued 10,874 loans in 2013, totaling more than $4.1 billion – a 21% increase over 2012. Besides, small businesses collectively represent big business for the banking industry, from the everyday banking space to benefits management and lending.

The thing is, according to research, small business owners are currently getting short changed when it comes to their credit cards and checking accounts. The question is - "why?"

Debt Instability for Business Credit Card Users

Let’s start with credit cards. The general-consumer credit card market changed substantially for the better when the CARD Act of 2009 was passed. However, the law does not apply to credit cards used primarily for business purposes. But for what reason?

“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, assistant professor of banking law at the University of California, Irvine, told CardHub in a recent interview

No matter how savvy you are, it’s impossible to run a business when you don’t know how much your debt is going to cost from one day to another. Most importantly, the lack of CARD Act protection means that credit card issuers are still allowed to raise rates on business card debt whenever they want, rather than having to wait until the account becomes 60 days delinquent, as they would with consumers.

Small business owners therefore have zero debt stability when they follow industry labels and use mostly cards branded for business. Certain issuers – namely, Bank of America (BAC) – have proactively extended various CARD Act protections to their small business credit cards.

Business Checking: More Fees & Features, Less Interest

Business checking accounts are known for offering the most features, as the budgeting and expense analysis needs of small business owners tend to outweigh those of the general public. That is expected.

What isn't expected is the fact that business checking accounts charge more than their general-consumer counterparts in nearly every major fee category. Neither is the interest rate advantage offered by consumer accounts (see charts below).

Comparison of Common Fees

  Business Consumer - Branch Consumer -Online
Monthly Fee $8.63 $5.96 $3.91
Non-Bank ATM Withdrawal $1.83 $1.75 $1.00
Pay Bill Online $1.29 $0.46 $0.24
Account Overdraft $33.00 $32.00 $28.00
Insufficient Funds $33.00 $32.00 $28.00

Comparison of Interest Rates

  Business Consumer - Branch Consumer - Online
$1,000 balance 0.11% 0.26% 0.43%
$3,000 balance 0.11% 0.24% 0.39%
$10,000 balance 0.12% 0.22% 0.41%
$25,000 balance 0.11% 0.13% 0.36%
$50,000 balance 0.12% 0.11% 0.39%

 What’s The Deal?

The way things currently stand, small business owners are best off using a combination of business and personal accounts in order to get the best of both worlds.

What has led us to this point? Regulatory issues obviously have played a major role, but it appears that banks are also capitalizing on a lack of price sensitivity within the small business markets. In other words, banks have no incentive to improve their terms because their target market is willing to pay what’s being offered.

Why aren’t small business owners as cost-conscious as everyone else? One reason is that entrepreneurship rates have spiked in recent years in reaction to the lack of opportunity within the traditional job market, so a lot of them are still learning the ropes. Additionally, many small business owners are dealing in big-money industries, so a few dollars here or there might not faze them as much as most of us. Nor should we forget that, with the Federal Reserve keeping interest rates low, most small companies are using rather than saving their money, resulting in dampening interest and competition within the business checking space.

Ultimately, the why doesn’t really matter because this is the banking landscape that we are stuck with and must learn to operate within. So, don’t be afraid to make small business management a bit personal, and always be certain to compare mulitple offers before submitting an application.

Odysseas Papadimitriou is CEO of the personal finance websites WalletHub and CardHub.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Are small business owners getting short-changed by banks?
Read this article in
https://www.csmonitor.com/Business/new-economy/2014/1218/Are-small-business-owners-getting-short-changed-by-banks
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe