Increase in Personal Credit Cards Explains Small Business Loan Decline?

Scott Shane. the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University, recently shared the law of unintended consequences and its relationship to the drop in small business lending in an article that appeared in Crain’s Cleveland Business, entitled: Use of Personal Credit Cards May Explain Drop in Small Business Lending. Here’s our video blog discussion:

Basically, Professor Shane thinks the decline in small business loans may not really be a decline so much as a shift in where small business owners are now obtaining credit. In addition to banks tightening their lending restrictions and the weak real estate market, Shane thinks the CARD Act, which went into effect in February 2010, has something to do with the drop in small business loans.

In a nutshell, the CARD Act protects consumers from having to deal with unwarranted interest rate hikes, while also reducing credit card fees.

To further prove his theory, Shane points to a National Federation of Independent Business, who reported that “the fraction of small business owners who use personal credit cards for business increased from 42 percent in 2009 to 49 percent in 2011, while the fraction who use business credit cards declined from 64 percent to 59 percent.”