Subprime Cardholders, Business Loans Tied to Cards Seen Growing

September 1, 2011

Here's some disconcerting news: lending to subprime consumer borrowers is on the rise, according to Equifax, the credit reporting agency.

And in a related development, AdvanceMe, Inc., a leading provider of cash advances against merchant credit card receipts, reports it has more than doubled its loan portfolio since 2007.

It took AdanceMe almost a decade to disburse $1 billion to small and mid-sized businesses (SMBs) that accept major credit cards, explained Glenn Goldman, president and CEO of Capital Access Network, AdvanceMe's parent company. The second $1 billion in advances took less than four years to add up; and Goldman expects the company to reach the $3 billon mark in merchant cash advances by 2013.

AdvanceMe is one of a small army of firms that lend to cash-strapped merchants based upon anticipated credit card receipts. Working through merchant acquiring banks and their partners, these companies take a cut of daily credit card receivables before funds get deposited to a merchant's account, thereby assuring payback..

Capital Access says its research suggests two out of three "Main Street" merchants seeking collateralized loans are being turned away by banks, and that one in 10 of SMBs are turning to non-traditional lenders, such as cash advance firms and peer-to-peer lending groups, to meet their working capital needs.

According to the U.S. Department of Commerce, there are roughly 1.1 million retail and food establishments in the U.S., which are businesses that traditionally have accepted credit cards.

Card Issuers Look to Subprime Growth

Meanwhile, Equifax reports that banks issued about 15 million new credit cards between January and May if this year. The most notable data point: reported was a 60% year-over-year jump in new cards issued to subprime borrowers (defined as those with credit scores below 660). And it's not just the marginal folks playing the credit game; Equifax said it's seeing plenty of growth as well among cardholders with credit scores below 600.

This shift toward subprime credit card issuance is especially noteworthy given that in the face of a growing recesion, consumers had been holding off on credit card spending, choosing instead to pay with cash on deposit, using either debit cards or checks. In fact, debit card usage in the U.S. now exceeds credit card usage, according to the Federal Reserve.

Recent changes ushered in by the Dodd-Frank financial reform legislation, however, could reverse that trend as card-issuing banks start imposing new fees on debit card customers to make up for diminished merchant acceptance fees. (See related story here.)

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