A recent article from ACA International quoted a report from Transunion that says that credit card balances are at their highest levels since 2008. While this is a scary notion for the general population, it has even more frightening implications for businesses that must extend credit to their customers in order to complete sales.
With the amount of overall outstanding credit continuing to rise, it is clear that many consumers have not learned from their mistakes in 2008 and history may be doomed to repeat itself.
If and when that happens, small businesses extending credit to their customers are going to be the last ones left holding a suddenly empty bag dealing with a difficult loan recovery process. Unfortunately, there may be nothing at all that they can do about it.
Here are six reasons why these rising credit card balances pose an ominous threat to small businesses:
Less Overall Buying Power
With the overall amount of outstanding credit continuing to rise, simple math suggests that this means every customer that walks in the door has, on average, more debt than the average customer in previous years.
Since every customer walking in the door has more and more debt, the customers as a whole of a particular business are going to have far less buying power than ever before. This makes it much harder for them to commit to large purchases that help keep businesses profitable.
In addition to having less buying power, customers with more debt are more likely to overextend themselves. These overextended customers are far more likely to fall behind on their payments and their account will eventually end up in the hands of a debt collection company.
More Competition for a Smaller Market
If the average customer for every business has less buying power and is more likely to be overextended, the entire economy is destined to start shrinking. That means that businesses will have to become more competitive as they fight for smaller and smaller shares of a shrinking market.
This will likely lead to businesses feeling obligated to offer special terms to customers who would not usually qualify for them, which will likely lead to more delinquent accounts.
Threat of a Global Recession
As the economy shrinks due to reduced buying power and overextended consumers, the next logical step is for the global economy to fall into a recession. Obviously this is not going to be a positive for any type of businesses, but small businesses are the ones that will likely feel the most pain during this time.
Increasing Cost of Debt Servicing
With more and more debt being held by consumers, the cost of servicing that debt is continuing to rise as well. That means that the average small business customer is going to be paying a significantly larger portion of their income towards servicing their debt than ever before. This leaves them with even less buying power and results in them finding themselves even more overextended.
The Credit Cycle
These reasons all contribute to a credit cycle where the average consumer can easily fall deeper and deeper into debt. At that point, their only option is to borrow more money at higher interest rates to get out of that debt. This makes the entire situation even worse and then the problem starts over and repeats itself.
It is not fun to think of the doom and gloom of another credit collapse or even a repeat of the Great Depression, but this is exactly the type of thing that many small businesses around the country should have on their radar. We might not be able to stop these increasing credit balances, but we should be doing everything in our power to protect ourselves from the probable results of them.