Small business owners and credit cards: an analysis by gender and location.

Robinson, Sherry ; Finley, John T.

ABSTRACT

Small business owners who find it difficult to obtain traditional financing from banks often resort to using credit cards, usually at a higher rate of interest. To further examine credit card use by small business owners, data from the U.S. Census Bureau's 2001 Survey of Income and Program Participation were analyzed. The study specifically compares the proportions of incorporated and unincorporated business owners who have credit card or other types of debt with people who are not business owners. Not surprisingly, owners of unincorporated small business, especially sole proprietors, were the most likely to have credit card debt.

INTRODUCTION

Small business credit cards have become increasingly popular, providing business owners not only with convenience, but also easy access to fast credit. According to the SBA Office of Advocacy (2006, p. 1), "the number of small business loans outstanding under $100,000 increased 25% between June 2004 and June 2005...The increase came mostly from credit card use by small business." This study further explores small business owners' credit card use by comparing the proportions of incorporated and unincorporated business owners with credit card debt. In the following sections, a brief background on credit card use is provided, leading to the methodology of this study, and the results.

CREDIT CARD USE

Credit cards became popular because of their user-friendliness and the decrease in post depression aversion to financial risk. People rebelled against the previous logic of going without items until they could save up enough to purchase them outright (Nocera, 1994). In 2003, 35 million out of the 144 million cardholders regularly made only the minimum payment on their credit card accounts (PBS Frontline, 2004). Many cardholders have contributed significantly to the mounting number of bankruptcies (7 million bankruptcies from 1999-2004) in recent years. One of the important and worrisome issues with this vast cardholder base is that "most cardholders do not view their credit card balance as a loan" (Nocera, 1994, p. 20). According to the Federal Reserve (2005), the average family filing for bankruptcy in 1997 owed $36,000 in high-interest credit cards and other debt while earning only $24,000.

Banks that issue credit cards do so because of the high potential profitability of this financial product. With interest rates that climb as high as 25-30%, the industry continues to reap the benefits of consumer credit usage that has drastically increased in the last 50 years. In the U.S. alone, 641 millions cards were issued in 2003, generating $30 billion (PBS Frontline, 2004). During the 1983-1995 period, there was a real increase of 179% in such borrowing as credit rose to $812 from $291 1983 constant dollars based on household data (King, 2004, p. 56). Interest rates are not, however, the only cost associated with credit card use. Penalties and fees accounted for 28% of credit card issuer profits in 2000 and 31% a year later (Lazarony, 2005).

The importance of credit cards has likewise grown among small business owners in the last 10 years. In a survey of the members of the National Federation of Independent Business (Scott, Dunkelberg, & Dennis, 2003), 11% of business owners in 1995 reported that credit cards were their most important source of working capital. That proportion grew to 15% by 2001. Approximately 6% depended on credit cards alone for financing. Of the 82% of business owners that used credit cards, 44% carried balances. In addition, 54% of all surveyed business owners took advantage of trade credit and 20% used personal loans. Credit cards were most important to small companies with less than $500,000 in sales, women business owners, and businesses less than 10 years old. People who had been in business fewer than ten years were the most likely to carry a credit card balance.

Credit cards are clearly an important element in U.S. finances today, both among business owners and the general population. This study further examines credit card use by incorporated and unincorporated business owners, comparing these groups with people who are not business owners. In the following section, the data from a nationwide survey are analyzed, with special attention given to the proportion of people having credit card debt and the average debt carried by those who do not pay off their balances monthly.

METHODOLOGY AND RESULTS

Data were obtained from the U.S. Census Bureau's 2001 Survey of Income and Program Participation through the use of Data Ferret. Over 48,000 people from age 18 to 88 were included. Two important variables used in this study were the dollar value of credit card debt and whether the respondent had no debt, credit card debt (alone or with other debt as well), or only debt that was not from a credit card. This variable was limited to debt in the respondent's own name. Therefore, the proportions of people reporting debt may be underestimated while the percentage of people with no debt may be overestimated as married respondents may essentially owe money, but it is in their spouses' names. In the following tables presenting the data regarding the debt variables as well as demographic variables, both actual and expected counts from cross-tabs matrices are included where appropriate in order to allow for easier analysis of the association between the variables.

Analysis of the data in Tables 1 and 2 shows that there was not a close relationship between the proportion of people with credit card debt and business ownership, although there was a significant difference in the mean debt held by those with credit card debt. When business ownership was broken down into incorporated and unincorporated businesses, as shown in Table 3, an association emerged. More than 19% of unincorporated business owners in the study had credit card debt in their own name. In contrast, only 15% of incorporated business owners had this debt. One explanation for this could be that owners of incorporated businesses have better access to lower-cost bank loan financing. Because incorporated businesses are separate legal entities, their owners may incur debt in the name of the business, leading to a high proportion of people in this category (81.0%) claiming they have "no debt" in their own name. The proportions of people with no debt were very similar between unincorporated business owners and non-business owners (76.4% and 77.6%). Non-credit card debt percentages were similar across all three categories.

Among those with credit card debt, unincorporated business owners had the highest mean debt (see Table 4). ANOVA showed a significant difference between the means. Post hoc analysis revealed the difference was significant (sig. .000) between non-business owners and unincorporated business owners. However, it was not significant between incorporated business owners and either of the other two groups. In all three groups, the standard deviation was very large in relation to the mean due to a large range.

When the data from unincorporated businesses were further broken down into sole proprietorships and partnerships (Table 5), there was again a statistically significant relationship as sole proprietors were more likely to have both credit card and other types of debt. This could logically be due to the fact that partnerships allow multiple people to combine their resources, whereas unincorporated sole proprietors must borrow money they need but do not have.

In comparing the mean debt among people with credit card debt (see Table 6), sole proprietors had a mean approximately 50% higher than non-business owners. While the ANOVA showed a significant difference among the means, post hoc analysis revealed there was a statistically significant difference between the mean debt of sole proprietors and non-business owners (sig. .000) but not between partnerships and either other group.

When the same data were broken down by location, as shown in Table 7, a slightly different picture emerged. Within metropolitan regions, the proportion of people with credit card debt was significantly related to business ownership, with 14.6% of incorporated business owners having credit card debt, compared to 19.0% of non-business owners and 21.5% of unincorporated business owners. A similar relationship was not, however, found in non-metro areas.

To further compare debt usage by location, data regarding incorporated and unincorporated business owners were isolated and analyzed. Although there was not a significant relationship between debt and location among incorporated business owners, an association was found among the unincorporated business owners. Non-metro residents were more likely to have no debt (82.4% compared to 73.9%) and one-third less likely to have credit card debt (14.0% vs. 21.5%). The lower incidence of credit card debt could suggest that business owners were able to obtain financing from small rural banks with whom they have long standing personal relationships, as is common in rural areas. However, these non-metro business owners were also slightly less likely to have non-credit card debt. This would suggest that they are more averse to debt in general. Non-metro residents who did not have a business or were unincorporated had lower average debts, although there was a statistically significant difference only among those without businesses (Table 8).

The data were also broken down by sex, as shown in Table 9. Similar to the way in which there was a significant association between debt and business ownership among metro residents, but not among non-metro residents, there was a relationship between debt and business ownership among men, but not among women. As in previous analyses, unincorporated business owners had the highest proportion of credit card debt (19.0% compared to 14.6% and 14.8%), and the lowest proportion of people with no debt (76.5% vs. 80.9% and 80.5%).

When comparing the proportions between, rather than within, the sexes, business ownership was important. Among non-business owners, women were one-third more likely to have credit card debt (20.2% vs. 14.8%) and less likely to have no debt (75.1% compared to 80.5%). Despite the higher propensity to carry debt, the women's average debt was significantly lower than men's (see Table 10). These sex-based relationships were not evident among business owners (incorporated or unincorporated). This suggests that in regard to credit card usage, men and women who are business owners are more similar to each other than are men and women in the general population. While there was more than a 5% difference between the proportions of non-business owning men and women with credit card debt, there was only about 1% difference between the sexes when grouped according to business ownership status (incorporated or unincorporated).

DISCUSSION AND CONCLUSION

The findings of this study show that while owners of incorporated businesses were the least likely to have credit card debt when compared to unincorporated businesses owners or people without businesses, and unincorporated business owners were the most likely to have credit card debt. Despite high standard deviations, the mean debt (of those with credit card debt) was found to be significantly higher ($4103 vs. $5792) among business owners. When incorporated and unincorporated businesses were separated, non-business owners had significantly lower debt than unincorporated business owners ($4103 vs. $5904). Sole proprietors were found to have the highest mean debt ($6117) when partnerships were placed in a different category. This would suggest that the business owners, especially sole proprietors, use personal credit card to debt to help finance their operations. Because these data were limited to credit cards in the respondent's own name, future research should examine debt by family, to give better insight into borrowing practices.

Breaking the data down by sex, this pattern held true for men as there was a significant association between debt and type of business ownership, with incorporated men having the lowest proportion of credit card debt carriers, and unincorporated men having the highest. Men without businesses, however, were more similar to incorporated male business owners. In contrast, women without businesses were more similar to unincorporated women, and a more similar proportion of incorporated women had credit card debt, so that there was not a significant association between debt and type of business ownership among women. While an association was found between debt and sex among non-business owners (women were more likely to have credit card debt, but a lower mean dollar value), this association was not found among either type of business owners. Taken together, these findings suggest that men and women who are business owners tend to act more similarly than do men and women in the general population.

Location was also a factor in that an association was evident between the overall proportion of people with credit card debt and business ownership in metro areas, but not in non-metro areas. However, when analyzed by business ownership status, these data showed that among unincorporated business owners and those without businesses, metro residents were approximately 50% more likely to have credit card debt, whereas the proportions were not significantly different between incorporated business owners in each location. This could indicate that rural residents tend to have more of an aversion to credit card debt, or perhaps even debt in general. Business owners without debt or with lower levels of debt may not be taking advantage of the growth that could be achieved through leverage. On the contrary, bankruptcy is a lower risk for people with little to no debt. Future research should further explore this issue to determine if metropolitan business owners face greater failure and bankruptcy rates, or it rural business owners have lower levels of growth.

REFERENCES

Federal Reserve Board (2006). Monthly Report on Consumer Credit (G.19 Report). Retrieved June 15, 2006, from http://www.federalreserve.gov/releases/g19/Current/

King, A. S. (2004). Untangling the effects of credit cards on money demand: Convenience usage vs. borrowing". Quarterly Journal of Business and Economics, 43(1 / 2) 57-80.

Lazarony, L. (2005). The higher the balance, the higher the late fee. Retrieved April 12, 2005, from http://www.bankrate.com/brm/news/cc/20020408a.asp

Nocera, J. (1994). A Piece of the action: How the middle class joined the money class. New York: Simon & Schuster.

PBS Frontline. (2004). Secret history of the credit card. http://www.pbs.org/wgbh/pages/frontline/shows/credit.

Scott, J. A., W. C. Dunkelberg, & W. J. Dennis. (2003). Credit, banks and small business--The new century. Washington, D. C.: NFIB.

Small Business Association. (2006). Small and micro business lending for 2004-2005. Washington, D. C.: Office of Advocacy.

Sherry Robinson, Penn State University

John T. Finley, Columbus State University

Table 1: Proportion of People with Credit Card (CC) Debt and Other Debt

 No debt CC debt Non-CC debt Total

Not a business 34780 7964 2100 44844
 Expected value 34790 7969 2056
 Within category % 77.6% 17.8% 4.7%
Business owner 2797 643 153 3593
 Expected value 2789 639 167
 Within category % 77.8% 17.9% 4.3%

Chi-square 1.360 sig .507

Table 2: Mean Debt Among Those with CC Debt by Business Ownership

 Mean std. dev.

Not a business owner $4103 6391
Business owner $5792 7953

*** t = -5.249 sig. .000

Table 3: Proportion of People with Credit Card
(CC) Debt and Other Debt by Business Ownership

 No debt CC debt Non-CC debt Total

Not a business owner 34780 7964 2100 44844
 Expected value 34790 7969 2056
 Within category % 77.6% 17.8% 4.7%
Incorporated bus. owner 926 171 46 1143
 Expected value 887 203 53
 Within category % 81.0% 15.0% 4.0%
Unincorp. bus. owner 1871 472 107 2450
 Expected value 1901 435 114
 Within category % 76.4% 19.3% 4.4%

*** Chi-square 102.212 sig. .000

Table 4: Mean Debt Among People with CC Debt by
Type of Business Ownership

 Mean std dev. Min Max

Not a business owner $4103 6391 $1 $118000
Incorporated bus. owner $5483 7644 $39 $60000
Unincorp. bus. owner $5904 8067 $1 $60000

*** F = 20.215 sig. .000

Table 5: Proportion of People with CC Debt and Other Debt
by Unincorporated Business Ownership

 No debt CC debt Non-CC debt Total

Sole proprietorship 1514 409 93 2016
 Expected value 1540 388 88
 Within category % 75.1% 20.3% 4.6%
Partnership 357 63 14 434
 Expected value 331 84 19
 Within category % 82 3% 14.5% 3.2%

** Chi-Square 10.145 sig. .006

Table 6: Mean Debt Among People with CC Debt
by Unincorporated Business Ownership

 Mean std. dev. Min Max

Not a business owner $4132 6422 $1 $118000
Sole proprietorship $6117 8406 $1 $60000
Partnership $4521 5204 $100 $23000

*** F=18.094 sig. .000

Table 7: Proportion of Business Owners with Debt
by Location and Business Ownership

 No debt CC debt Non-CC debt Total

Not a business owner

 Metro 26166 6473 1513
 Expected value 26488 6405 1599
 Within category % 76.6% 19.0% 4.4%
 Non-metro 8614 1491 587
 Expected value 8293 1899 501
 Within category % 80.6% 13.9% 5.5%

Incorporated business owners

 Metro 748 134 36 918
 Expected value 744 137 37
 Within category % 81.5% 14.6% 3.9%
 Non-metro 178 37 10 225
 Expected value 182 34 9
 Within category % 79.1% 16.4% 4.4%

Unincorporated business owners

 Metro 1281 372 81 1734
 Expected value 1324 334 76
 Within category % 73.9% 21.5% 4.7%
 Non-metro 590 100 26 716
 Expected value 547 138 31
 Within category % 82.4% 14.0% 3.6%

*** Among not a business owner Chi-square 150.919 sig. .000
Among incorporated Chi-square 0.660 sig. .719

*** Among unincorporated Chi-square 20.824 sig. .000

*** Overall Within Metro Chi-square 20.201 sig. .000
Overall Within Non-metro Chi-square 6.017 sig. 198

Table 8: Mean Debt Among People with CC Debt
by Location and Business Ownership

 Mean Std. dev.
Not a business owner
 Metro $4177 6563
 Non-metro $3783 5571
 t = 2.380 sig. .017
Incorporated business owners
 Metro $5380 8003
 Non-metro $5855 6254
 t = -0.384 sig. .802
Unincorporated business owners
 Metro $6204 8490
 Non-metro $4788 6157
 t = 1.870 sig. .063

Table 9: Proportion of Non-Business Owners with Debt
by Sex and Business Type

 No debt CC debt Non-CC debt Total

Not a business owner

 Men 16328 3004 946 20278
 Expected value 15727 3601 950
 Within category % 80.5% 14.8% 4.7%
 Women 18452 4960 1154 24566
 Expected value 19053 4363 1150
 Within category % 75.1% 20.2% 4.7%

 *** Chi-square 222.734 sig. .000

Incorporated business owners

 Men 691 125 38 854
 Expected value 692 128 34
 Within category % 80.9% 14.6% 4.4%
 Women 235 46 8 289
 Expected value 234 43 12
 Within category % 81.3% 15.9% 2.8%

 Chi-square 1.758 sig. .415

Unincorporated business owners

 Men 1173 291 69 1533
 Expected value 1171 295 67
 Within category % 76.5% 19.0% 4.5%
 Women 698 181 38 917
 Expected value 700 177 40
 Within category % 76.1% 19.7% 4.1%

 Chi-square 0.350 sig. .840

*** Overall within men Chi-square 19.581 sig. .001

*** Overall within women Chi-square 7.046 sig. .133

Table 10: Mean CC Debt of Non-Business Owners with Debt by Sex

 Mean Std dev.
Non-business owners

 Men $4474 7009
 Women $3778 5975

 *** t = 3.882 sig. .000

Incorporated business owners

 Men $5330 7556
 Women $5899 7947

 t = -0.421 sig. .675

Unincorporated business owners

 Men $6042 8130
 Women $5683 7982

 t = 0.472 sig. .638