Firms getting by on credit cards

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Nearly 80 per cent of small and medium-sized business owners are using personal credit cards to finance their companies, a Massey University survey has found.

David Deakins, director of the university's Centre for Small and Medium Enterprise Research, said the findings showed SMEs were facing tough times during a sluggish economic recovery.

The survey canvassed 1808 firms late last year, finding 78 per cent of respondents were using credit cards for finance, up from 67 per cent in 2009.

Deakins said credit cards were now the most common form of business finance for small and medium companies, alongside trade credit.

"These findings reflect the fragile nature of the recovery, as the recession continues, with businesses not wanting or not able to access a bank loan," he said, adding that it would require sustained confidence in the economic situation for banks to increase their lending to SMEs.

NZIER principal economist Shamubeel Eaqub said it would only become problematic for firms to use credit cards if they let debt build up - and began gathering interest - rather than paying it off each month.

Deakins said it was difficult to tell how many firms were regularly paying off credit card debt, as that was not something the survey respondents had been asked about.

Provided the debt was paid off on a monthly basis, he said, credit cards were a flexible way for SMEs to finance cashflow and meet working capital requirements.

"There is a risk they may get a bad debt - particularly in times of recession - but if it helps cashflow over a temporary period it could be a good solution," Deakins said.

Interest rates on credit cards are much higher than those on bank business loans, which often involve some kind of security, such as the residential home of the firm's owner.

The business base lending rate was 10.12 per cent a year in March this year, according to the Reserve Bank, while credit card interest rates can be as high as 20 per cent.

The survey also found a greater number of medium-sized firms were reporting increased turnover last year than small and micro companies.

The study defines a medium firm as having between 50 and 99 staff, a small company between six and 49 workers and a micro enterprise five or fewer employees.

Deakins said micro firms were more likely to be reliant on the domestic market, rather than exporting to countries experiencing faster growth than New Zealand.

Eaqub said SMEs were a crucial section of the economy and it was important they thrived.

"Small businesses are quite an important driver of new business creation and job creation, so if [SMEs] are doing it tough then the rate of business growth and job creation will be pretty moderate," he said.

BusinessNZ chief executive Phil O'Reilly said the fact that the number of SMEs using credits cards was increasing was indicative of the times and highlighted the pressure many firms were facing.

"Right now things are pretty tough for a lot of businesses," he said. "Even though New Zealand's not technically in a recession it will feel like that for a lot of those small businesses."

Deakins said SMEs accounted for 35 per cent of New Zealand's GDP.