Credit gets Tighter for the Self-employed

The lifeline for many entrepreneurs has been a battery of credit cards, used to get through slow seasons, build inventory, or buy time. According to a May 2009 study from the National Small Business Administration (NSBA),
fifty nine percent of small business owners were using credit cards to finance their business, an increase of twenty percent over the level seen just five months before. The study also reported that a stunning 79% of small business owners had seen their credit cards terms get worse over the six months preceding the study. That was up from 69% in December.
The most extreme example of the hardships facing small business owners occurred in late May when credit card issuer Advanta, which focuses on small businesses, told approximately one million of their card holders that they would stop accepting new charges. The company has been hit on multiple fronts with a rise in uncollectible debt, overdue credit card payments, and the loss of its most consistent funding source, an independent trust that provides resources for new transactions. “Advanta's financial woes mean even more pressure on already-strapped business owners,” said Todd McCracken, president of the NSBA. Small businesses nationwide have been trying to replace their lost credit lines ever since the announcement.
Credit card companies, who were already tightening their lending standards due to mortgage losses and the resulting credit crunch, have been tightening further in reaction to the Credit CARD Act which was signed into law in May. For the self-employed, whether applying for a personal or company credit card, proof of two consecutive years worth of earnings and a near perfect credit score are just a couple of the requirements for a new card.
Due to the lack of availability of other alternatives, small business owners have flocked to credit cards as a means of financing in a slowing business environment. For many, the liquidity provided by a new credit card is the last chance they will have to keep their businesses alive. Credit card companies, more averse to lending in desperate situations than ever, are making it more difficult than ever for business owners to get new credit. If they approve it, there’s a good chance that the credit will be expensive.
Some issuers still deny that the approval process has changed at all. A recent quote from credit .com by Bank of America spokeswoman Betty Riess stated, "Generally, we look at credit scores, stability, ability and willingness to pay." While those factors may remain unchanged, the depth at which each one may be investigated can make the process impossible for the applicant to satisfy. For instance, if pay stubs aren’t available, the next request could be for verification of income by an accountant which could prove costly by on its own.   
Two aspects of the Credit CARD Act work against credit cards accounts for small businesses and their owners. The first is that the law severely limits issuers’ ability to raise rates and fees on their holders’ accounts, specifically those perceived as high risk. Small businesses have always been considered risky from the lenders’ viewpoint, but with an economy in recession and the inability to adjust for changing risk profiles, lenders are making small businesses prove beyond a shadow of a doubt that they will be able to cover the charges put on those cards. The second issue is that business cards are exempted from the limitations on interest rate hikes that are afforded to those for intended for personal use, raising the possibility that business cards will be charged consistently higher rates than other cards. For issuers looking to mitigate losses from other areas, business cards will consistently provide a tempting target for rate and fee hikes.
For those businesses their owners that are looking for new credit cards one the most productive things they can do is to establish a business relationship with the prospective new issuer. A big positive is opening additional accounts, such as savings, checking, and money markets. Banks are looking at those types of accounts more than ever in the determination of whether they’re going to extend credit. Showing a commitment to the bank in terms of additional relationships can go a long way toward approval and acceptable terms.
Tom Daily, formerly a senior executive at Discover Card said, “If you already have an existing banking relationship with an institution, that's the first place to submit a credit application. Banks and credit unions often will consider the total value of a business relationship, which can improve your chances of expanding available credit or of being approved for a credit card." 
In addition to opening accounts at a new institution business owners should get their documents in order, whether applying for a business or a personal card. The more positive information the applicant can pull together, the better. The business owner that can develop a picture of organization, stability, and success with the appropriate documents has a much better chance of approval under the new restrictive approval process by issuers.
Those documents include:
* Financial statements such as profit and loss statements, balance sheets, bank statements.
* Tax returns – Offer to give the bank returns above and beyond what they request.
* An itemized list of assets held outside the business including real estate, vehicles, collectibles, and anything else.
* If the business is new, submit a professionally constructed business plan. Conveying the path to success for  business will give the lender a higher degree of confidence and make chances of approval that much better
Being turned down doesn’t mean the application is dead, especially if you have established other accounts with issuer. Ask about lower credit limits or a higher interest rate while you season the card. As the issuer gets a better feel for the business’ monthly cash flow, credit limits may get loosened and interest rates reduced but that may take some time considering the current environment. That being said, becoming a trusted bank customer over time will ultimately lead to better rates and lower fees, a couple of things that many are searching for at the moment.

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