As a rule, legislators have been loath to extend to businesses consumer protections normally available only to private citizens. When Congress passed the Truth in Lending Act of 1968, one of the first examples of credit card regulation, it followed that principle, with many arguing that government should have no role in contracts between private companies. Similarly, the Credit CARD Act of 2009 specifically excluded business credit cards.

Credit card regulation proposed for business cards

One congresswoman feels strongly that this should change. According to the website of Representative Nita Lowey (D-NY):

…over 60 percent of small businesses owners are forced to use their credit cards to meet their capital demands. Yet small business owners are not protected under the same consumer protections that individuals enjoy. Lowey introduced HR 1137, the Small Business Credit Card Act of 2011, which would extend the important new consumer protections from the CARD Act to small businesses with 50 or fewer employees. Small businesses should be given the support they need to create jobs and rejuvenate our economy, not be subject to unfair interest rate changes, deceptive practices, and unnecessary fees.

Credit cards for small business capital

It’s not clear where Nita Lowey got that figure of more than 60 percent of small business owners borrowing on cards to fund their capital needs. A 2010 report from the Federal Reserve suggests that, at the end of 2009:

• 83 percent of small businesses used credit cards for transactions.
• 64 percent used cards designed for businesses.
• 41 percent used personal credit cards.

However, the Fed said that only 18 percent of small business owners admitted to actually borrowing (carrying forward balances) on credit cards. It seems unlikely in equal measure either that borrowing on cards has suddenly shot up from 18 percent to more than 60 percent (although, given the reluctance of banks to lend to small businesses, it may well have risen considerably), or that Rep. Lowey would use an unreliable figure. Perhaps the two studies’ methodologies were different.

Credit card debt liability

Last week, Scott Shane, who is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University, Ohio, blogged on the Businessweek web site on this topic. And he made a compelling argument. The IRS, he says, reports that 72 percent of all businesses in this country are sole proprietorships, which means that their owners are ultimately liable for all credit card debt. And, in any event, credit card companies almost always insist that individual owners accept liability for such debt, even if the business is a company rather than a sole trader.

A further blurring of the line between personal and business cards was highlighted on this blog on May 19 (Business credit cards can be a bad idea for consumers), when it revealed the extent to which some credit card companies target private citizens with potentially unsuitable business credit card offers.

Perhaps Professor Shane had a point when he concluded: “As a basic principle, applying the CARD Act to any credit card for which the holder is personally liable for the debt seems fair.”

Published 06/02/11