By Tom Abate, Chronicle Staff Writer
Friday, June 5, 2009
Source(06-04) 19:14 PDT -- The Advanta credit card, used by an estimated 1 million U.S. firms, ceased honoring new charges late last week, leaving many business owners scrambling to plug a financial gap caused by the abrupt shutdown.
"They are or were the largest independent small-business card issuer," said Curtis Arnold, an industry expert at CardRatings.com who has followed Advanta Corp.'s woes.
"This is unprecedented," Arnold said. "A million businesses have seen their accounts and their credit frozen. This is a worst-case nightmare scenario come true."
Steve Boullianne, owner of the nine-person computer networking firm Ipsofacto IT Services in San Francisco, said he got a two-day notice last week that his Advanta card was being canceled even though he had never missed a payment in seven years.
"This has been a huge disruption," said Boullianne, who made and paid about $40,000 in charges each month, using the card to pay bills and buy equipment and services.
"A credit card is an essential part of how a small business does business," said Boullianne, who is now trying to get a new business card only to find that banks are reluctant to issue them and want more financial records than it took to get his mortgage.
Arnold said Advanta's troubles are indicative of a crisis in the $250 billion small-business credit card market.
He said Advanta, which has been around since 1951 and had always specialized in the small-business market, had faced competition in recent years from larger firms including American Express, Capital One, Citi and Chase.
"They got extremely aggressive in their pricing in terms of interest rates," Arnold said. "They basically grew too fast and didn't put enough emphasis on underwriting" to screen out the riskiest borrowers.
By the end of March, Advanta, based in Pennsylvania, was writing off about 20 percent of its card debt as uncollectible. Curt Beaudouin, a senior analyst with Moody's Investors Service, said that endangered its source of funds, which flowed from the sale of credit-backed securities.
As Beaudouin explained, these securities are baskets of credit card debt that are resold to investors under terms that allow the money spigot to be shut off if the lender's losses exceed certain targets.
On May 11, Advanta warned in a news release that "the deteriorating economic environment" could force it to cease new credit card lending by June 10. On May 22, it informed the Securities and Exchange Commission that "upon further evaluation," it planned to "to close its customers' accounts" effective May 30.
Beaudouin said the Advanta situation is only the second time he can recall that a card issuer has ceased to honor it, the other being the 2002 shutdown of NextCard, an Internet-based charge card that emerged during the dot-com era.
Arnold said other business card lenders have tightened their standards, closed accounts and lowered limits, making it harder for small firms being ditched by Advanta to find replacements.
Aaron Burns, chief executive of Upper Playground Enterprises, an apparel and art retailer in San Francisco, said he was surprised to have his firm's $40,000-limit Advanta card closed.
"We have other sources (of credit), but that was an important piece of the puzzle," he said.
But rather than spend time applying for a new card, Burns said that if the company gets into a cash-flow crunch, it would probably seek extended payment terms from its vendors.
"We've stopped looking for credit," he said.
E-mail Tom Abate at
tabate@sfchronicle.com.