Ready access to credit is an integral part of the lifecycle for just about every business. As such, it is critical that community banks are able to fully meet this vital need for small businesses through a variety of lending channels. This fact becomes immediately evident upon even a cursory review of current small business trends.
According to data from the U.S. Small Business Administration and the U.S. Census Bureau, there are nearly 19 million small businesses with annual revenues of just under $25 million. Of these, almost 13 million are non-employer businesses (“self-employed”) while almost 6 million are employer businesses (“firms”).
In the early years, many small business owners turn to their personal credit resources to help fund the start up of their business. Consumer credit cards frequently serve as a convenient lending vehicle for start up enterprises. At this stage, small business owners benefit from the convenience of immediate access to credit, simplified recordkeeping, and they can often receive rewards for their purchases. They also have the flexibility to self-select whether they want to pay off their purchases after their interest free grace period or revolve the balance for a few months to assist cash flow.
As companies mature, so do their credit needs. Once they are able to demonstrate a track record of performance and growth, they often look to segment their credit needs. This is done by obtaining more traditional sources of business financing from community banks, while shifting their transactional activity to true business credit cards. Unlike traditional consumer credit cards, the majority of business credit card accounts pay their balance in full each month. A recent industry study shows less than 30% of business accounts revolve their balances.
A Rewarding Solution
Regardless of their company’s growth stage, business owners are still looking for many of the same things from their credit card – convenience, float, rewards, and organized records. In other words, business owners still recognize that good things come in plastic. Business owners are also looking for an expanded offering that can include items such as specialized reporting, capability to download transactions and export them to money management programs, and online support across all cardholders. Business owners also have a greater interest in rewards. Ironically, while travel rewards are still the most widely held rewards package, when business owners are asked about what is important to them in a rewards program, the most frequent answer is some type of cash rebate feature. Based on this, the best option may be to offer a broad based rewards program that delivers a variety of choices.
Other benefits include the ability to establish their business credit card as a vehicle to support bill payment for recurring transactions as well as traditional travel and entertainment expenses. Business owners are also able to segment their business activity from their personal activity. And, last but not least, they will treasure the upcoming change resulting in zero liability for fraudulent transactions on business credit cards.
Meet Multiple Needs
If your bank only offers consumer credit cards, you may not be meeting all of the needs of your small business customers. In fact, you could actually be prompting them to seek out other alternatives – including your competition. In 2004, the U.S. Small Business Administration ranked the top five small business lenders as American Express Bank FSB, Capital One FSB, MBNA Corporation, Citigroup, and Wells Fargo. These five lenders are leading issuers of both consumer and business cards. If they see a business need worth serving, community banks should be able to serve that same need – and with higher service levels and a much higher trust factor.
Find The Right Partner
Community banks have the option of meeting this need on a direct basis through their own resources or they can seek to partner with an experienced provider who can supply a comprehensive, competitive, and compelling credit card solution. This credit card partner should stand ready to work with you and never compete for your customers while offering superior service and competitive pricing. Community banks should question the logic of having a credit card “partner” whose primary profit source comes from selling deposit and loan products on a direct basis to customers just like yours.
Regardless of whether your bank supports its own internal credit card program or your bank selects a partner/correspondent solution, the program must offer consumer credit cards to help launch start up enterprises. These consumer cards should feature options for low rates as well as rewards. At the same time, the program should also have true business credit cards with a full feature product suite that includes cards with and without rewards. By offering both, your bank will be better prepared to match the diverse needs of small business owners. For example, Visa indicates that reward programs with a perceived value above 77 basis points generally have fees associated with it, yet some business owners may be wary of carrying any credit card with an annual fee.
TIB’s Associate/Full Service Cardholder Program supplies community banks with a turnkey, risk-free credit card solution. This advantageous offering provides you with new income opportunities, while enhancing your visibility through cards featuring your bank’s name. Key benefits include competitive consumer card products, exceptional service levels 24 hours-a day for cardholders, robust business card offerings, and a generous rewards program. In this program, TIB funds the loans and assumes the liability. Your bank can participate in the approval process and TIB provides advance notification of applications not initially approved. Revenue sharing is available from both referrals and cardholder activity. In addition, TIB can partner with your bank to purchase an existing credit card portfolio enabling you to reallocate resources, eliminate credit and fraud risk, and provide a meaningful revenue stream – all while maintaining your name on the card.
One final statistic: According to BAI Small Business Payments in 2006, small businesses have indicated a willingness to switch banks for better payment services. In fact, the likelihood for businesses to switch for better payment services is 50%; the same odds as a simple coin flip. It is probably safe to assume that most bankers would not trust their customers to a “heads or tails” call. That being the case, will your bank be ready to meet their needs and provide a competitive solution?
James Hudson is senior vice president, credit cards, at TIB (www.tibsite.com).