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The number of micro-business loans -- defined as loans of up to $100,000 -- to small businesses shot up 10 percent last year, while traditional loans stayed stable.

Small businesses around the country racked up 10.8 million micro- loans last year, about 1 million more than the year before, according to a study by the U.S. Small Business Administration's Office of Advocacy. But the dollar value on those loans -- $126.8 billion -- was up only 4.4 percent.

The difference is in credit cards, said Charles Ou, senior economist with the SBA's Office of Advocacy, and the study's author.

"There was a 10 percent increase in micro-loans but it is almost completely from credit card operations," said Ou. "Once you take out the credit card operations, you see that small business loans did not grow."

Excluding them, the actual number of small loans last year grew by less than 0.5 percent.

The jump in credit card loans to small businesses is part of a trend that has been building for several years, said Ou, as banks become increasingly aggressive in their credit-card promotions.

It is much less expensive for them to extend credit via credit cards than through traditional small business loans, which require more in the way of documentation and collateral.

Because of the expense, banks often will not grant business loans for less than $25,000.

"You have to understand that we are a really regulated industry, you have got to dot your I's and cross your T's and there are less costly ways of doing that," said Gary Thomas, vice president of Key Bank and Trust in Owings Mills.

Fledgling business owners who do not have the financial wherewithal to qualify for traditional loans often have no choice but to use credit cards to finance their businesses. But even long-term business owners turn to credit card loans for everyday expenses.

And why not, said Paul Taylor, executive director of the Small Business Resource Center in Baltimore. Credit-card companies have an aggressive presence on the Internet and elsewhere, making the process irresistibly convenient for the consumer, he said. American Express, which is one of the largest Small Business Administration lenders, will extend a line of credit as part of a marketing tool to its already established, low-risk customers. And credit-card loans satisfy a small business's need for small amounts of money fast -- something banks typically cannot.

"No doubt about it, a lot of small business people use it to buy goods and products just like you buy clothes," said Alan Stephenson, director of the SBA's Baltimore District Office. "But if you look at the price, it becomes counter-productive, you can't grow your business." With yearly interest rates as high as 23 percent, paying off credit-card debt can be a difficult feat.

Thomas, for example, routinely reviews loan applications for between $80,000 and $150,000 from business owners who, once they have reached some level of success, are looking to pay off their debt. Such debt is not uncommon, he said.

"Since the recession in 1991, you see a lot of people trying to change their vocation, and that is often how they do it," he said.

Of course, alternative micro-loan programs are available, though many small business owners are unaware. Stephenson's office, for example, is in the midst of building a program with Innovative Bank for the truly small business loans of $5,000 or less, he said.

"Our program is underutilized," said Oliver J. Phillips, chief of business development at the SBA's district office. "Because we are not yet a household word, unfortunately, and because small businesses fall into credit cards."

# posted by Medical Information : 1:50 AM