The Perils Of Credit Cards In A Slump

Businessmen or entrepreneurs can give many reasons for taking up more credit cards. With the dynamism in the economy, taking high-interest debt or loans has become very dangerous. Let us take the example of Will. He began with his third year in business and decided to hire some employees. He also wanted to take up some more space to move out of his garage from where he worked and produced re-cycled paper. Will's plans could not turn into a reality when he had no money with him. He was asked to pay all the expenses in cash. Then he decided to use credit cards to meet the expenses.

Just like Will, there are a number of self-employed people who use credit cards to meet most of their business expenses. Whenever they see their profits increasing and are unable to gather financial sources for some more expansion, they rely on credit cards.

Debt on credit cards is seen as an easy way out for most people who are unable to find other sources for taking up a loan. The corporate and consumer variety of debt on credit cards is the reason for the recession in the economy. Defaults in the corporate bonds have reached an all time high and are expected to increase with time.

There are many other reasons for the economic recession. The Federal Reserve Board had made some interest-rate cuts in the month of January. The reason behind this is considered the bad loans on the balance sheets of various financial institutions, especially banks. The debt on credit cards has also reached an all time high of $500 billion-plus. How much of small-business debt can be fitted in the present scenario?

The two main sources of finance that the small businesses get are either from the credit cards or home-equity loans. Most small business owners prefer credit cards rather than going to the local lender for traditional loans. There are some serious causes of concern where the small-business debt is increasing because of which the economy is going in the slump due to the debt.

Here are a few examples of the ways in which the credit cards perils are causing a slump in the economy:

a) Most of the time, it is the self-employed who are advised on getting their credit cards consolidated to remove their credit card debt. There are several consultants who have been giving such advice to them from a very long time. It is now that the frequency of people who are going in for credit card consolidation has increased.

b) According to a study by the Federal Reserve, the number of self-employed who had applied for credit cards has almost doubled in 2004 from 1989.

c) Number of businesses that use credit cards for day to day expenses has also increased considerably.

There are quite a few reasons behind the increasing usage of credit cards among the small business enterprises. Foremost is the consolidation of banking industry that resulted in elimination of local lenders. After that, the small-business owners lack the resources that is required as collateral for guaranteeing a bank loan. Last, most businessmen don't have necessary education and are ill equipped to lay out the sort of business plan that lenders require. 

As the economy slows down the usage of credit cards by the small business enterprises to meet their operation costs is going to fly high. If addicted to the use of credit cards, you better chalk out a business plan that will give you a clear picture of your company's expenses, watch interest rates on the credit cards; try to keep yourself away from using plastic for items you'd be unwilling to buy if it were a personal expense, such as new furniture. Recently, lots of self-employed people are coming in with high credit cards debt. So, if the economy dips into recession, lots of small-business owners may decide that credit card financing isn't as good an idea as they once thought of.