STATEMENT
of the
The Honorable Nydia Velazquez, Chairwoman
House Committee on Small Business
“The Role of Credit Cards in Small Business Financing”
Thursday, April 3, 2008

 

Today, the Committee will examine the increasing role played by credit cards in financing our nation’s small businesses.

In the past year, 60 percent of small firms made use of private and federally guaranteed loans.  In comparison, during that same period, 77 percent of entrepreneurs opted to buy new equipment and pay for other business expenses using a credit card.  The reason is simple.  Credit cards give small businesses access to capital they need to grow. 

That fact is especially crucial given the current economic climate, in which small firms are finding it difficult to secure traditional forms of financing.  Not surprisingly, the rate at which purchases are charged continues to rise—up 14 percent over the last five years.

Today, we will delve into what that means for small firms.  Credit cards have always been a convenient means of payment.  They expedite transactions while allowing for considerable ease and security.  Just as importantly, since 70 percent of small business owners pay their balances in full each month—they are gaining the equivalent of a 30-day interest-free loan. 

While credit card use is on the upswing, many federal programs specifically designed to offer small firms access to capital are falling short of this goal.  That is holding small businesses back and denying the economy contributions from entrepreneurs precisely when they matter most. 

In the past months, members of this Committee have heard testimony from the Federal Reserve, the Small Business Administration and a host of experts on small business lending programs.  Their testimony points to the considerable gap that remains in financing. 

The witnesses have also shed light on how the current economic downturn, rising foreclosure rates, and a plummeting housing market are compounding these capital challenges. In fact, just when our small businesses economy would benefit tremendously from an infusion of capital, financial institutions are pulling back on credit. 
As the availability of capital diminishes, more small businesses are delaying important purchases, halting expansion, foregoing the creation of new jobs, or laying off current employees altogether.  Ironically, this keeps small firms from doing what they do best—fueling the nation’s economic growth. 

In such an environment, it would make sense for the SBA’s lending and investment programs to step in.  Shockingly, the agency’s largest lending initiative—the 7(a) program—is doing the exact opposite.  The SBA is pushing to raise fees and erecting new barriers to small business loans.  As a result, 7(a) lending volume is down 14 percent, and lending to minority owned businesses has decreased by nearly 9 percent.  Clearly, this all runs counter to the program’s mission.

Given these realities, examining the role of credit cards  in the financing of small businesses just makes sense.  With the nation facing the prospect of a recession, it is also important to remember that entrepreneurs have always led the way back to economic recovery.  This Committee will continue to work to ensure they have the tools to do so again, and I know my colleagues will join me in strengthening what is working in the current system while correcting what is not.

I want to thank all the witnesses for being here today, and for offering their insights on these crucial issues.