FEATURE PAPER

Small Business and Credit Cards: New Rules for Plastic in an Economic Recession

The following paper was written by Robert J. Lahm, Jr., Robert B. Carton, Louis E. Buck, Jr., from Western Carolina University, and Charles R. B. Stowe, from Lander University. The paper was presented at the 2011 USASBE Conference.

Abstract

A lack of capital through traditional forms of lending to small businesses has long led many entrepreneurs to rely on credit cards. However, firms relying on credit cards have recently been subjected to numerous "any time or any reason" change in terms notices, and banks have cut credit lines, and increased rates, minimum payment amounts, and fees. The challenges encountered by small businesses in an already difficult business environment could well increase the time it takes for the economy to recover, because these are the very firms that would otherwise be driving job creation and growth.

Executive Summary

Small businesses in the United Sates have been subjected to significant stresses during the recession that began at the end of 2007 and has continued through 2010, with only a few signs of improvement (some of which have destabilized during the summer months of 2010). This paper reviews current issues related to small businesses and credit cards, with a particular focus on stresses experienced during the 2007-2010 recession, ongoing. A lack of capital through traditional forms of lending to small businesses has long led many entrepreneurs to rely on "plastic" in the form of more and more credit card debt, but banks have cut credit lines, increased rates, minimum payment amounts, and fees, or otherwise imposed more and more onerous terms.

One of the problems associated with this shift is the exposure that the firms relying on credit cards have begun to experience with increasing regularity, namely changes in the basic terms and conditions of the cards "at any time or for any reason," at the sole discretion of the lending institution, with little or no recourse for the borrower. Consumer angst reached a crescendo which served as the impetus for Congress to enact the passage of the C.A.R.D. Act, but so-called "business" cards were excluded. Further, many start-ups rely on "personal" credit card account types. Indeed, Federal Reserve Board data shows that as firms mature, they tend to more frequently adopt and use business credit cards. The challenges encountered by small business start-ups in an already difficult business environment could well increase the time it takes for the economy to recover fully, because these are the very firms that would otherwise be driving job creation and growth.

(Read Entire Paper)

TIP OF THE WEEK

Franchising and the Law

Franchises are governed by state and federal laws and regulations. The Federal Trade Commission (FTC) is the primary government agency involved in oversight. The FTC primarily serves to protect the interest of franchisees by directing the disclosure rules for franchisors. The process and specific requirements have evolved significantly over the past century, with the most recent changes occurring in 2008.

The Franchise Disclosure Document (FDD) has replaced the Uniform Franchise Offering Circular (UFOC) as the primary source of information for prospective franchisees regarding franchisors. It is registered with the FTC and must be organized into a common format so that prospective franchisees may more readily compare franchise opportunities. The FDD discloses the terms of the franchise relationship and any pertinent financial and legal issues affecting the franchisor, and must be provided by the franchisor a minimum of 14 days before the signing of a franchise agreement. As a practical matter, as a prospective franchisee, you should secure this document as early in the exploration and negotiation process as possible. The FDD includes such information as:

Overview and background - Company review and offer, background information on key personnel and directors, and disclosures of current and past litigation or bankruptcy.

Fees and costs - All initial fees, all anticipated operating fees, and a table of the potential cost ranges for every part of the initial investment.

Contractual obligations - Table of franchisee responsibilities with specific reference to the franchise agreement and the FDD, and an extensive list of franchisor obligations from pre-opening through ongoing operations. Also included are details about training programs and any required point of sale, advertising, or other required franchise systems. List of personal obligations of the franchisee.

Territory - Terms regarding the limits of the protected territory that the franchisee will receive. This could be a very large area or very small. Or, there could be no protected territory. This has huge significance for the franchisee because franchisors have often put franchisees so close to existing ones that they compete with one another for business.

Financial performance - Franchisor discloses the performance of franchisee units by providing statistical information with clearly stated assumptions and explanations of limitations. Prospective franchisees are best served by taking this data and carefully analyzing it to secure a better understanding of what is and is not stated, and to use it as a launching point for further research.

Data regarding existing units - Table data regarding the existing units in the franchise system, and the units that have closed or transferred ownership, can assist in understanding success rates and "churn" by the franchisor.

Financial statements and contracts - Past three years of the franchisor's audited financial statements and all contracts that the franchisee is required to execute. Contracts include the franchise agreement, and those for advertising co-op rules and conditions, real estate, personal guarantees, and territory development. Prospective franchisees should acquire legal and accounting review for these.

Termination, renewal, and transfer, and dispute resolution procedures - Policies regarding exit strategies, including fees and restrictions, as well as rules regarding mediation and/or negotiation versus requirements, and other conditions set by the franchisor, The refusal of a prospective franchisor to provide this information should be a red flag for any franchisee. Regardless of what a salesperson or franchise broker says to you, it is the FDD that is pertinent.

ANNOUNCEMENTS

Carland Academy

Want to learn how to commercialize an idea? Carland Academy is the complete source for online entrepreneurship training on the internet. From More Information, Click Here.

Allied Academies International Conference

The Allied Academies will hold its Spring 2011 meeting in Orlando. Presentation dates will be Wednesday April 6 through Friday April 8, 2011. For more information, Click Here.

NCIIA 15th Annual Conference

We invite you to attend the NCIIA 15th Annual Conference in Washington, D.C. March 24-26, 2011. NCIIA's Open is the premier conference for faculty and students involved in technology innovation and entrepreneurship in higher education. Explore the science, business and practice of catalyzing innovation in higher education. You'll have the opportunity to be part of the foremost community of thought leaders in these fields, take away tangible learnings from workshops taught by leading faculty innovators, make connections that will advance your work, see breakthrough technologies at our annual showcase of student innovations at the Smithsonian National Museum of American History, and experience Washington, D.C.. For More Information, Click Here

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