Are small business owners getting short-changed by banks?
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.
