NSBA President Testifies on Small Business Credit

March 24, 2009

With small businesses ability to access financing front-and-center in the minds of lawmakers, NSBA President Todd McCracken weighed in last week as an expert witness during two Congressional hearings. Both hearings were held at a critical time, just days after President Barack Obama unveiled his plan to unlock the credit market for small businesses through changes to the U.S. Small Business Administration’s (SBA) loan programs and requiring small-business lending reporting by the 21 largest banks receiving assistance under the Financial Stability Plan.

The first hearing, “Perspectives from Main Street on Small Business Lending,” was held by the U.S. Senate Committee on Small Business and Entrepreneurship about the challenges many American small businesses are now facing. McCracken’s testimony focused on the impact to small-business owners whose lines of credit have been cut.

Throughout his testimony, McCracken emphasized the fact that access to capital is a huge challenge even in economically prosperous times, and even more so in the current recession. He highlighted the fact that hundreds of banks have dropped out of, or drastically reduced their participation in SBA loan programs. Beyond SBA-specific programs, McCracken noted that even those banks on the receiving end of billions of taxpayer dollars have failed to increase their small-business lending, according to an analysis by the Wall Street Journal.

Citing a relatively new phenomenon occurring over the last 4 to 6 months, McCracken pointed NSBA’s Year-End Economic Report, a survey of NSBA members which showed nearly a third of respondents had experienced a decrease in their line(s) of credit—or a credit-card limit(s)—in the previous six months.

“These sometimes arbitrary reductions to existing credit lines and credit-card limits are having a profoundly negative affect on America’s small-business community” stated McCracken. He went on urge lawmakers to enact credit-card reform, including a provision that would require 45 days notice before a lender could reduce a credit line

Reductions in a small-business owner’s credit limit can have a significantly negative effect on future business operations beyond the constricting effects of tightened capital on a business. Namely, this reduction translates to a possible decrease of 50 points or more on one’s credit score, making it that much more difficult and/or expensive for the small-business owner to obtain a new credit-line or credit-card.

In his second hearing of the day, “H.R. 627, the Credit Cardholders’ Bill of Rights Act of 2009; and H.R. 1456, the Consumer Overdraft Protection Fair Practices Act of 2009,” held by the U.S. House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit, McCracken further expounded on the need to enact credit-card reform.

Citing the critical role small business plays in any economic recovery through the creation of millions of new, small firms typically due to large-firm lay-offs, McCracken described the various roadblocks budding entrepreneurs are likely to face today. Unlike during previous economic downturns, today’s entrepreneurs will be severely limited in their ability to finance a new business venture through: a) borrowing from themselves in the form of a second mortgage; b) borrowing from friends and family; and/or c) borrowing from a bank. Leaving one clear, often unattractive option: credit cards.

With nearly half of all small businesses relying on credit card financing, McCracken outlined some of the most unfair and deceptive practices of the credit card industry that are putting not only small businesses at risk, but potentially dragging out the recession by hamstringing entrepreneurial growth. Although certain protections were recently approved under the “Unfair and Deceptive Acts or Practices” (UDAP) rule, none of them will go into effect before July 2010.

McCracken emphasized the need to enact such reform now, reemphasized NSBA’s ardent support of the Credit Cardholders’ Bill of Rights Act of 2009 (H.R. 627), and urged the committee to explore additional ways they could protect small business through this bill.

“While NSBA unreservedly supports the enactment of H.R. 627, more must be done, including addressing interchange fees and ensuring that small-business credit cards are included in any broad reform of the credit-card industry.”

McCracken remarked in both hearings that the small-business community is not asking for a hand-out or any special treatment. Simply, small-business owners just want a level playing field upon which they can start, run and grow their firms.