The specter of looming tariffs has ushered in a wave of uncertainty for the bedrock of the American economy: small businesses. As if navigating inflation and soaring interest rates weren’t daunting enough, many of these smaller enterprises in retail and manufacturing now face the daunting prospect of supply chain disruptions, squeezed cash flow, and concerns about escalating operating costs.
This unpredictable landscape, however, is not devoid of opportunities. In a recent analysis by Riffing on Tariffs: Now Is the Time to Build Up Your Small Business Portfolio, Brian Riley, Director of Credit Advisory Services at Javelin Strategy & Research, explores how small businesses utilize their credit cards and how forward-thinking lenders can aid them in maintaining stability amidst chaos.
Keeping the Lights On
The primary reason small businesses fold is due to cash-flow issues. To survive, they require a reliable mechanism for managing their finances, which often translates into relying on a credit card. Just as consumers need seamless cash flow to manage household expenses, businesses face a unique set of challenges. Beyond the pressure to pay bills, they also need to ensure there’s enough cash available at the register. While a household might suffer from delinquency without severe consequences, a small business could face dire ramifications.
Research from Javelin reveals that the foremost use for small business credit cards is to cover their monthly utility bills. Utilities often form a significant monthly expense, and failing to pay these on time can jeopardize business operations entirely. By tying utility payments to a small-business credit card, owners can set up automated payments, freeing up cash while accruing valuable rewards.
However, small-business credit cards come with hefty spending limits—often reaching up to $50,000—but owners must exercise caution in their spending choices.
“It’s not really where you want to go for working capital,” Riley explained. “Interest rates tend to be higher, and while it may be the only source of readily available funds for less-established businesses, caution is crucial.”
The application of small business credit cards varies widely, but they are especially beneficial for seasonal enterprises, such as those in agriculture. Income might flood in during peak selling seasons, yet for months, businesses await revenue as crops grow. Navigating this cash flow timing is essential, and a credit card can provide much-needed flexibility.
The Case for a Single Card
Typically, households boast three to four credit cards. In contrast, most small businesses maintain just a single card, largely due to the relationship built with their bank. This loyalty is palpable.
However, this does not mean the market is closed off to additional options. Card issuers should actively seek to position themselves as a potential second card amidst the anticipated economic turbulence. Establishing a presence in a businessowner’s wallet is a golden opportunity for building a lasting relationship that can lead to further spending and engagement.
“Small businesses tend to be less organized,” Riley mentioned. “Many use basic financial management software, presenting straightforward opportunities for support.”
Getting In on the Ground Floor
While some leading banks have made strides in addressing the small-business card market, numerous others have yet to explore this niche, creating openings for smaller financial institutions that emphasize personal relationships.
“This is a prime area for credit unions and community banks to expand,” Riley stated. “They offer a markedly different approach than their larger counterparts, fostering a sense of community and personalized service.”
Currently, small-business credit cards are predominantly held by American Express, which boasts more small-business volume than both MasterCard and Visa combined. Amex offers a range of over a dozen card options compatible with their iconic brand or co-branded partners.
Effectively marketing a small-business card resembles strategies used to promote consumer cards. Issuers particularly favor reaching out to individuals just starting their journeys, akin to college students entering financial independence.
“Once you’ve established that relationship, you’ll find the person will likely enter different life stages: marriage, purchasing a vehicle, and so forth, opening additional financing opportunities,” Riley elaborated.
“This same logic applies on the small-business frontier. Securing a foothold allows for potential upselling and cross-selling, ultimately transitioning the relationship from a mere cardholder to a comprehensive banking partner, managing the entire lifecycle of the business.”
Uncertainty and Risk
However, the air of economic uncertainty necessitates that issuers tread carefully when managing risk. Small businesses often require higher credit limits and tend to spend more compared to consumer cardholders, promising potential volume for issuers, but vigilance is paramount.
“Financial institutions must conduct thorough credit assessments both at the onset and throughout the partnership,” Riley advised. “It’s crucial to monitor for shifts in spending patterns, economic pressures, and the complexities of various business sectors.”
“Now more than ever, small businesses rely on their credit cards. Savvy owners will stay ahead of the curve in managing cash flow, while those unprepared will feel an even greater dependence on these financial tools.”
