Firms struggle to pay credit card debt

When Andrew Uribe started building his salsa-making venture, he turned to plastic for start-up money.

But the business didn’t take off as quickly as he had hoped. Now the entrepreneur in Ellicott City, Md., has three credit cards that carry a combined $30,000, is behind on his bank loan and has moved out of the industrial space he had leased.

Working out of a commercial space in Baltimore’s Lexington Market that friends let him use on weekends, he has the capacity to pack only 1,600 jars of his Emy’s Salsa Aji a month instead of 14,000.

Uribe’s minimum credit card payments run $325 a month -- about 15% of his total monthly expenses -- which he says mainly cover just his interest payments.

“It’s horrible because any small profits that I am making, I’m using them to pay the credit cards,” Uribe said during a trip to New York, where he was meeting with potential investors. “It’s hurry up and pay, and swim or sink.”

Entrepreneurs have long used credit cards as quick financing. But with the sputtering economy, tightening credit market and cards’ notoriously changing terms, more small-business owners are struggling to pay their debt -- accumulated on personal as well as small-business credit cards.

As credit standards loosened at the beginning of the decade, banks expanded their small-business credit card offerings. Compared with the consumer credit card market, the small-business market was virtually untapped, and potentially lucrative, because business credit card use tends to be high volume and paid in full at the end of the month.

The result was a boom: Small businesses will charge 2 1/2 times more this year than when they ran up about $140 billion in 2002, according to estimates from TowerGroup, a financial service research and advisory firm.

But as the economy slowed, so did payments. Major small-business credit card issuers reported a sharp increase in late payments and bad debt over the last year. And the debt can last long after the business has failed.

Two years after starting Music America Records in Los Angeles, Jeremy Riney -- still a college student -- knew the record label was going under. He had financed his business with personal credit cards and owed about $100,000. When Riney missed a payment on one, his interest rates jumped from zero to about 30%.

“The business was going nowhere, so the only thing I could fund the business with was more credit cards,” Riney said. “I just started panicking.”

He learned his lesson. He didn’t borrow a dime to start his newest venture -- music search engine Project Playlist -- and earned enough to pay off his old debt within months.

Now credit card issuers are becoming more careful.

“The mantra before was bigger is better in the card business; now [issuers] are becoming much more risk-averse,” said Brian Riley, research director for bank cards at TowerGroup. “Standards are getting tightened in line with the economy.”

But businesses are still finding credit card loans relatively accessible. Over the last year, cards were the only source of small-business capital that hadn’t dropped off, according to the National Small Business Assn.’s 2008 annual survey. About 44% of small and mid-size businesses used credit cards for financing -- significantly more than any other source.

About a quarter of business-related credit card debt is on owners’ personal credit cards; the rest is on small-business cards. Business credit cards typically offer more generous terms and, if payments are on time, debt may not show up on owners’ personal credit reports, making it easier for them to get additional credit.

Bankruptcy lawyers and community groups say business-related credit card debt is a growing issue.

“It’s definitely quite a problem at the moment,” said Rob Vickers, senior loan manager at the Latino Economic Development Center in Washington, D.C. “It seems like I’m spending a lot more time helping people come up with a strategy to reduce their debt than to take on more debt.”

Personal credit problems and falling home values can exacerbate business debt. “Oftentimes small-business owners really haven’t separated out small-business debt from their own loans,” Vickers said.

Credit cards present another challenge to growing businesses, even successful ones. Unlike other loans, in which the interest rate is typically fixed for a set length of time, credit card interest rates can change with the business owner’s credit score.

Marilyn Landis, owner of Basic Business Concepts in Pittsburgh, says she has never missed a credit card payment. But when she increased her purchases on a card she used for travel, her credit score dropped, sending the rate on her small-business card to 28% from a promotional rate of 4%.

“What has made it increasingly difficult is that the credit card companies keep changing the terms and conditions,” said Landis, who also heads the National Small Business Assn. “It turns out not to be predictable.”

Businesses continue to work to drag themselves out of debt.

Emy’s Salsa Aji -- named after a spicy pepper and Uribe’s daughter Emilia -- is sold in 10 stores, including two Whole Foods locations. And Uribe is confident that he’ll make it work.

“Yeah, I’m drowning in debt, but the potential is there, so why give up?” he said.