Small Business Financing
The Federal Reserve Board recently released its report on the financial services and practices of small businesses, which comes from its 2003 Survey of Small Businesses. The data were collected from surveys given to a sample of businesses with fewer than 500 employees.
The report measured the extent to which small businesses use credit cards. It reports that 47% of firms used personal credit cards for business purposes. This number was higher among the smallest companies, but even among the largest firms, 33% of companies used personal credit cards to finance their business purchases. Given the relative ease with which companies could get business cards, it seems very risky to me to ask employees to use personal charge cards for business purposes. As many employees of failed Silicon Valley companies learned a few years ago, this is an unhappy story for the employees--who are now out a job and loaded up with business debt for which they are personally liable.
I think these data also reinforce the point made by Bob Lawless and Elizabeth Warren in their article The Myth of the Business Bankruptcy, 93 Cal. L. Rev. 745 (2005) which used survey data from the 2001 Consumer Bankruptcy Project to suggest that many so-labeled 'consumer' bankruptcies are actually the result of small business failure. As Ronald Mann explains in his new book, Charging Ahead, credit cards combine borrowing and payment features in one product. This often leads to a gap between what a employee intends to do--use the card to pay, and what ends up happening--using the card to borrow because the employer doesn't make good on the bill.
As a final note, the Federal Reserve finds a signficant difference by gender-ownership of firm in personal credit card use. Women-owned businesses are more likely to rely on personal credit cards to finance their business. The result of this difference may be women being more likely to incur personal liability if their company fails.
A link to the Cal. L. Rev. paper, "The Myth of the Disappearing Business Bankruptcy" is here: http://www.kauffman.org/items.cfm?itemID=667. The reason there is no link in the body of the post was my mistake. Katie had asked me if there was an online version, and I had forgotten this link existed.
Posted by: Bob Lawless | October 28, 2006 at 11:22 AM